m. 



LIBRARY OF CONGRESS. 



Chap. Copyright No. 

Shelf..>i'B...nl- 
S 

UNITED STATES OF AMERICA. 



isL9^ 



THE 



WORKING PRmCiPLES 



POLITICAL EOOKOMY 



IN A NEW AND PEACTICAL FOEM 



A BOOK FOR BEGINNERS 






SyM/MACVANE ^j. --^^ -f" ^ 
McLean Professor of History in Harvard College 



Second Edition. Revised. 
NEW YORK: 

Maynard, Merrill, & Co., 

29, 31, AND 33 Bast 19th Street, 
1897. 






Copyright, 

1890 and 1897, 

By S. M. MACVANE. 



PREFACE. 



The aim of this book is to give, in small compass, a 
sufficient view of economic doctrine for the ordinary needs 
of intelligent citizens. I have had two principal motives 
in writing it. In the first place, I wished to show that 
the principles of Political Economy may be developed in 
such a form as to bring out, more clearly than is done 
in the standard books, their close and vital connection 
with every-day industry. In the second place, I wished 
to suggest some modifications, chiefly in points of detail, 
of the conclusions commonly accepted hitherto by the 
leading economists. 

Political Economy is among the most practical of sci- 
ences, yet it has been made to look very much like an 
abstract philosophy. The great writers seem to have 
been more concerned about the logical validity of their 
reasoning, than they were to keep their work, at all 
points, plainly and closely in touch with the mechanism 
of practical business. The result is, that their readers, 
after mastering the doctrine as a matter of abstract 
theory, are too often quite in the dark as to the precise 
mode of its application in practice. Economic truth can 
hardly obtain general acceptance, as the basis of indus- 
trial hygiene, until it is so presented as to apply, directly 
and without laborious interpretation, to the visible facts 
•of industrial life. 



vi Preface. 

In the little book here offered, the attempt is made 
to work out the leading principles of economics with a 
constant eye on actual affairs. The facts discussed are 
taken in their ordinary, observalole form ; the student is 
asked and helped to analyze them, with a view of per- 
ceiving their relations to each other, and the underlying 
principles by which they are controlled. The plan has 
difficulties which the more abstract treatment avoids ; 
but I hope the character of the result may be found a 
sufficient compensation. 

The modifications of theory which I have ventured 
to suggest grow naturally out of the method I have fol- 
lowed. In all fundamental points, my results are in 
substantial harmony with the teachings of the older 
economists. But in the analysis of cost of production, 
and in the consequent distinction between savings and 
working capital, I have ventured on an innovation which 
seems to be called for in the interest of clearness, both 
in the discussion of wages and in the law of value. In 
the treatment of money and prices, I have departed con- 
siderably, in secondary points, from tlie beaten track. 
In developing the theory of prices, I found it necessary 
to have the use of a term which should recognize bank 
deposits as an integral part of the circulation. The term 
" bank currency," though not free from objection, seemed 
on the whole to be the one most suitable for the case. 
I accordingly adopted it, with the understanding that it 
includes, on the side of Notes, those issued by Govern- 
ments as well as those issued by ordinary banks. 

In the great question of Protection and Free Trade, I 
have simply tried to indicate the grounds of controversy. 
So long as the Tariff is a political issue, it seems only 
fair that a book intended, in part, for use in High Schools" 



Preface. vii 

should contain nothing offensive to either of the parties 
into which our citizens are divided. 

This book makes no pretence of being easy reading. 
The subject-matter is, I think, too complex, and at some 
points too elusive, to admit of a treatment that shall be 
at once easy and adequate. The best a writer can hope 
for is that his work shall be found clear and instructive 
by those who give time to the study of. it. Not that 
Political Economy is, on the whole, a very difficult study. 
It merely calls for some patient reflection, especially at 
those critical points where sound reason is opposed to 
superficial appearances. There is nothing in the science 
that young persons of ordinary ability may not master, 
if only they apply themselves. It would be a happy 
reform in our national education, if a portion of the 
time that is now spent by our youth over barren puzzles 
in percentage, and the arid subtleties of formal gram- 
mar (English and other), were devoted to intelligent 
study of elementary economics. I cherish a hope that 
this little book may do something towards promoting 
'such a reform. 

Cambridge, Mass., 
Dec. 1889. 



CONTENTS. 



Chapter page 

I. The Study of Political Economy ... 11 
II. Division of Labor : Exchange of Products : 

Wrong View of Money .... 17 

III. The Uses of Money: Buying and Selling . 25 

Questions and Exercises . . . . . 35 

IV. Of Wealth and the Distinction between 

Natural Wealth and Wealth produced 

BY Labor 36 

V. Why Natural Wealth, originally a Gift to 
Men, cannot always be obtained for 

Nothing 43 

VI. Of Labor, and its Productiveness . . 52 
VII. Nature and Necessity of Capital . . 58 
VIII. Capital Represents Industrial Improve- 
ments 65 

IX. Two Classes of Producers, Laborers and 

Employers 72 

Questions and Exei'cises 83 

X. Of Value in Exchange .... 86 
XI. Cost of Production as the Ultimate Regu- 
lator OF Value 92 

XII. Exceptions to the General Law of Value 109 

Questions and Exercises 120 

ix 



Contents. 



XIII. Op Prices, or the Value of Money . 

XIV. Production of the Precious Metals 

XV. Bank Currency 

XVI. Questions between Gold and Silver . 
XVII. Inconvertible Legal Tender Notes . 

Questions and Exercises 

XVIII. Wages and Profits as Portions of the Pro- 
duct OF Industry 

XIX. AVages of Individual Laborers 
XX. Further Considerations Regarding Wages 
XXI. Profits of Individual Employers 
XXII. Interest on Borrowed Savings 

XXIII. Productiveness of Natural Agents : Eco- 

nomic Rent 

XXIV. Consequences of Diminishing Returns . 

Questions and Exercises 

XXV. Exchange of Products between Separate 

Communities, or International Trade 
XXVI. Free Trade and Protection . . . . 
XXVII. Concluding Suggestions 

Questions and Exercises 

Index 



Tage 
122 
141 
1.50 
165 
182 
192 



194 
212 
231 
251 
270 

286 
310 
321 

323 
349 
364 

377 
381 



Political Economy. 



CHAPTEE I. 

THE STUDY OF POLITICAL ECONOMY. 

1. Political Economy and Daily Life. — The general 
subject of political economy is wealth, which is simply 
a short name for the numberless things we all like to 
have and to own. Everybody needs some wealth in 
order to live ; most persons are eager to get a great 
deal of it, — more, perhaps, than would be good for 
them, if they got it. How to get the wealth we need 
in the world is, for most of us, a very serious question. 
Few therefore, even among young people, can be en- 
tirely ignorant of some at least of the ways by which 
wealth may be obtained. There are few who have 
not seen some kinds of wealth actually produced. 

Those who live in the country, or have even spent 
their holidays there, must have seen something of the 
ways by which a very important part of wealth, namely, 
our food, is produced. Those who live in the city wit- 
ness the activity of mills and factories and the busy 
operations of commerce. We have all seen men at 

11 



12 Political Economy. 



work, and know in a general way what labor accom- 
plishes. There are but few of us who have not seen 
machinery in operation, or are ignorant of the powerful 
aid it gives to human labor. Everybody knows what 
it is to buy and to sell. We are all familiar with the 
use of money, and checks, and bank-notes. We all 
know the difference between saving and spending, and 
between diligence and sloth. No intelligent person can 
grow up in a civilized community without often hearing 
and thinking about these matters, for they are part and 
parcel of our daily life. 

Now these are the chief topics of political economy. 
The object of the science is to study the conditions 
under which we carry on the struggle for tlie means 
to supply our daily wants, — the struggle for wealth. 
It aims to discover the principles that govern the pro- 
duction and sharing of wealth ; the circumstances that 
favor and those that obstruct the largest production 
and the fairest sharing of the product. 

2. True and False Political Economy. — It is at once 
an advantage and a disadvantage for political economy 
that it deals with subjects that enter so closely into 
our daily life. The advantage is that the science must 
always possess great interest for every intelligent lover 
of his country and his fellow-men ; it can never lack 
earnest and devoted students. The disadvantage is 
that beginners in political economy are seldom wholly 
beginners. Their familiarity, in practical ways, with 
many of the topics and questions of the science, — 



Difficulties of the Study. 13 

things tliey hear and ideas they pick up in one way 
or another, — give them a sort of political economy 
before coming to the set study of it. 

Now if this political economy were good and sound 
so ■ far as it goes, it would save us the necessity of 
much elementary explanation and definition. But, un- 
fortunately, it is for the most part wrong. It is adopted 
without sufficient reflection, is not tested at all, and has 
usually no better basis than half -seen facts or wholly 
misinterpreted relations of things. 

Economic subjects are peculiarly ill adapted for hasty 
treatment, being full of pitfalls for the unwary. They 
often have, superficially, an appearance of great sim- 
plicity, while they are in fact highly complicated. The 
motions of the earth and its true relations to the 
heavenly bodies are not more effectually disguised to 
the careless observer than are the real facts of eco- 
nomic life. To pierce through the illusions and gain 
a clear view of things as they really are, demands an 
amount of thought and study that busy people are 
seldom able, and careless people are seldom willing, 
to bestow. 

So it comes to pass that popular political economy 
is so often erroneous. So also it comes to pass that 
beginners in the set study of political economy have 
usually much to unlearn. They have to give up ideas 
which they previously regarded as familiar and unques- 
tionable truths. Much of the space in every book on 
political economy has to be devoted to the refutation 



14 Political Economy. 



of false theories. In fact, the prevalence of wrong 
ideas is one of the chief causes for the existence of 
political economy. If the laws of production, wages, 
currency, etc., were so clear and simple that he who 
runs might read, there would be no occasion to spend 
time in writing or studying books about them. 

But it is not only false theories that beginners have 
to unlearn. They have to unlearn wrong ways of look- 
ing at things and fallacious modes of reasoning about 
them. This is more difficult. Habits of thought are 
hard to shake off. Long after the student has per- 
ceived the faultiness of his former way of thinking, he 
is apt to find himself unconsciously falling back into 
it. Other sciences have no such obstacles to contend 
against. In chemistry, for example, the student has 
everything to learn ; but then he has nothing to un- 
learn. He comes to the study with a mind open to 
the truth, and can advance from point to point unem- 
barrassed by any relics of past errors. 

3. Political Economy and Politics. — The fact that 
political economy has to appeal to reason in opposition 
to appearances, and has to reject as false so many views 
held by the unthinking, makes the spread of economic 
truth slow and difficult. The close connection of 
economic questions with the daily life and welfare 
of the people tends rather to aggravate than to 
diminish this difficulty. There must be laws about 
trade, and the currency, and banking, and taxes. Now 
men are almost certain to disagree as to the kind of 



Economic Questions in Politics. 15 

laws it - would be wise to pass in relation to such 
matters. Thus in every free country economic ques- 
tions often become political questions. This view or 
that principle becomes the rallying-cry of a party. In 
the debates that ensue men are prone to seek argu- 
ments rather than the truth, and pohtical success 
rather than the public welfare. In such contests it is 
unfortunately true that sound and just principles are 
often difficult to explain and uphold in opposition to 
false and glittering theories, that seem to be more 
in harmony with daily observation. 

Fallacies exist only because false doctrine often looks 
truer than the truth. As political economy has many 
such strongly entrenched fallacies to expose and refute, 
and has to run counter to the cherished opinions of 
large classes of men in relation to subjects that in- 
terest them deeply, it is inevitable that it should be 
regarded by many as a tissue of idle dreams, or even 
something worse. 

The science has also suffered from the denunciations 
of benevolent enthusiasts whose schemes for the im- 
provement of the world it has had to oppose. Well- 
intending visionaries take it amiss to be reminded of 
the hard realities of life. The offence of political 
economy is that it insists on getting at the true 
causes of the poverty and misery that are so sadly 
prevalent in the world. It rejects all remedies that do 
not address themselves to the seat and source of the 
disease. For this, eloquent enthusiasts have denounced 



16 Political Economy. 



it as "the gloomy science," and an enemy of human 
progress. They have no doubt turned many against it. 

Yet political economy is but reason and common 
sense applied to practical affairs. It has made great 
progress in the last hundred years, and is steadily, if 
slowly, winning its way to general acceptance. Even 
in quarters where it is rejected as a system, many of 
its most important principles are followed in practice. 



CHAPTER II. 

DIVISION OP LABOR. -EXCHANGE OP PRODUCTS.— 
WRONG VIEW OP MONEY. 

1. The struggle for Money. — The source of many 
wrong theories about economic subjects is found in the 
use of money in business transactions. Money is exceed- 
ingly important to us in practical ways, and at the same 
time hard to get. To a superficial observer the struggle 
of life may well seem to be a struggle for money. 
All our gains, and the worth of all our possessions, 
are expressed in money. The man who has plenty of 
money is regarded as rich ; the man who has none is 
regarded as poor. 

Industrial labors of all kinds are apt to be thought 
of merely as ways of getting money. The laborer who 
works in the factory or in the field ; the employer 
who plans and directs the work ; the merchant who 
buys the product and sells it again ; the builders of 
houses and ships and railways ; the inventors of ma- 
chinery and the owners of land, — all seem to exert 
themselves only for the sake of the money they hope 
to get in return. 

2. Money not Useful in Itself. — Now this view of 
industrial activity, though natural and convenient for 

17 



18 Political Economy. 

practical purposes, is totally false and misleading when 
used as the basis of economic theories. The first step 
in the study of political economy is to gain a larger 
and truer view of industrial operations. One who re- 
flects a little will perceive that money, in and of itself, 
has no qualities that should make it an object of uni- 
versal quest. It is, in truth, the one form of wealth 
that has no independent use for us. Every other thing 
is useful in itself; money is useful only as a means of 
getting other things. 

If some vmseen power were suddenly to deprive 
everybody of all things that are good to eat or to drink 
or to wear or to enjoy in other ways, leaving even a 
most liberal price in money for everything so taken 
away, it is easy to see that the money would not save 
us from cold, hunger, and misery. Money is useful 
only where we can get other things in exchange for 
it, — ^ useful only when we part with it. 

3. Division of Labor. — Why, then, are men so much 
concerned about money ? Why care for it or use it at 
all ? In order to answer these questions we must con- 
sider a point of the very highest importance in actual 
life as well as in political economy. Civilized life de- 
mands the use of many different commodities. One 
has only to think of the various things a person in 
ordinary circumstances makes use of in the course of a 
single day, in order to perceive how great the number 
and variety of commodities necessary for comfortable 
livinsf. 



Division of Labor. 19 

Now, no one person could possibly succeed in making 
so many things. Life is too short to learn the way of 
making even a small part of them. If each person 
were limited to the things he could produce for himself, 
we could never rise above the condition of rude bar- 
barians. Civilization is possible only by dividing up the 
work of production, — by arranging that each producer 
shall make enough of one commodity for a considerable 
number besides himself. This is called Division of 
Labor. The following great advantages are gained by 
the use of it. 

4. Advantages of Division of Labor. — ( a ) A great 
saving of time in learning how to make things. There 
are but few things that can be made properly without 
some degree of skill and special knowledge. Skill can 
be acquired only by practice. All fine and compli- 
cated products require much skill and knowledge : 
years of practice are necessary for learning the art of 
making them. If every man had to learn the art 
of making shoes, for example, merely in order to supply 
his ' own need of them, one can readily see how great 
a waste of time there would be. By arranging that one 
man shall learn the art, and shall make shoes for many 
others, a great saving is effected in the work of learning. 

(&) A man who devotes himself to the production 
of one thing learns the art of making that one thing 
thoroughly. He learns all about the materials and 
tools. He seldom wastes time and materials by bung- 
ling. He learns to turn everything to the best account. 



20 Political Economy. 

Thus he is able to make a better article, and to make 
it more quickly than would be possible for one who 
had to divide his time among many different kinds of 
production. 

(c) Division of labor enables each person to do 
the work for which he or she is best fitted. Those 
who have great muscular strength and endurance can 
do the kinds of work in which strength and endurance 
are necessary. Those who have deft fingers and deli- 
cate taste can devote themselves to occupations in 
which there is need of taste and dainty workmanship. 
Thus division of labor enables all the talents of the 
community to be turned to the best account. The 
result is to increase production and improve its 
quality, besides promoting in other ways the comfort 
and happiness of the producers. 

By an extension of the principle, people living in 
different parts of the country are enabled to make full 
use of the natural advantages which their neigh- 
borhood possesses. Thus local peculiarities of soil 
climate, water-power, mineral resources, etc., become 
available for supplying the needs of the people living 
in other places. 

{d) Division of labor makes the use of machinery 
possible. No man would build a cotton-mill in order 
to make cotton cloth for his own family. There would 
be no saving of labor in doing so. "When the mill 
can be used to supply a whole city or a whole country 
the case is different. It then becomes the means of 



Division of Labor. 21 

saving a great deal of labor ; or, better, of adding 
greatly to the productiveness of labor. By division 
of employments, and the machinery it makes possible, 
men are enabled to use the forces of nature with 
great effect, as aids in production. 

(e) Division of labor is applied with great advan- 
tages to the different parts or stages of the production 
of things that are made up of several different materials, 
or go through a number of different processes. For ex- 
ample, take the production of penknives. For making 
the blades, iron ore must be dug from the earth ; then 
it must be smelted and turned into steel; then it must 
be cut up and beaten into the required shapes; then 
each piece must be ground and polished. Each of these 
operations is distinct from the rest, requiring different 
tools, a different kind of skill, and a different sort of 
place for carrying it on. 

Again, the production of the handles is an entirely 
different sort of work from that of making the blades, 
and is itself broken up into several distinct operations. 
There is, therefore, the same reason for subdividing the 
work of making penknives that there is for division of 
labor in producing different commodities. The only 
difference is that here the different sets of laborers 
co-operate towards the production of a single com- 
modity. This difference has led some to distinguish 
this sort of division of labor by a separate name : viz.. 
Combination of Labor. 

Whatever we call it, the important thing to be clear 



22 Political Economy. 



about is that the production of all complicated articles 
is greatly cheapened, and the quality greatly improved, 
by dividing the work of making them among a number 
of different sets of laborers. 

5. Necessity of Exchange. — Enough has been said, it 
may be hoped, to suggest the great power of division 
of labor to increase the productiveness of industry. 
But obviously production of things by division of labor 
has the awkward result of leaving them in the wroncj 
hands when they are finished. Nobody has the things 
he needs ; everybody has, instead, a great stock of a 
single article. In order that all persons shall get the 
things they need for their own use, a most compli- 
cated set of exchanges must take place. This is the 
one serious disadvantage of division of labor: it is the 
price we pay for all the advantages, 

6. Exchange by Barter : its Difficulties. — Now it is 
at least conceivable that the producers should meet 
each other at appointed times and places, and exchange 
products one with another. In a very small community 
this might perhaps be done. But one readily sees that 
exchange of products conducted on that plan would be 
very laborious, if not quite impracticable, in a large 
community. 

Two very great difficulties would be encountered. In 
the first place, the man who has produced, we will sup- 
pose, a carriage, and wishes to get in exchange for it a 
watch, a coat, and a barrel of flour, must find a man 
who not only wishes to get a carriage, but also has a 



Exchange of Products. 23 

watch, a suit of clothes, and a barrel of flour, — all of 
the kmd desired, — to give in exchange for it. Since, 
under division of labor the man who wishes the car- 
riage has presumably but one commodity to offer in 
exchange, and that one commodity would rarely happen 
to be one of the things needed by the carriage-maker, 
we readily see how awkward the situation would be. 

Exchange by direct barter between producers would 
involve so much trouble and so great risks of failure, 
that the whole advantage arising from division of labor 
might be lost thereby. 

7. A Central Exchange. — The only plan by which 
barter could be made possible in practice would be to 
have some very wealthy man or company undertake the 
business of making the exchanges. The undertaking 
would be a vast one. A stock would have to be kept on 
hand of all the various commodities that people want, 
including many different sorts and qualities of each com- 
modity ; and not merely a single specimen of each 
thing, but so large a supply of it that all persons in 
the community could get access to it and obtain the 
desired quantity. 

The universal exchange, we may assume, would have 
to be about as large as all the present shops and ware- 
houses put together. Probably the management of so 
vast a business would exceed human capacity. To say 
nothing of the knowledge of all articles of trade that the 
business would call for, the mere size of the establish- 
ment and the extent of its operations would render the 
supervision of it exceedingly difficult if not impossible. 



24 Political Economy. 



8. Difl&culty of Exchange without a Standard of Value. — 

But supposing these difficulties to be overcome, there 
would remain, in the second place, the problem of find- 
ing some ready way of expressing the proportions in 
which things should exchange for each other. The per- 
sons concerned could not say, as we do, that a thing is 
worth so many dollars, for that would imply the use of 
money, which they are supposed not to have. In order 
to express the value of each article, they would need a 
list stating how much of every other article a given 
quantity of it would exchangq, for. In fact, the company 
would need two such lists for each article, one for use 
in buying and the other for use in selling it ; for they 
could not afford to buy and sell at the same value. 

The number of commodities of all kinds entering into 
the trade of a civilized community being so great, each 
list would be extremely long, and the number of lists 
would be extremely great. There would, further, be 
endless labor in correcting them from day to day, owing 
to the continual changes that occur in the market value 
of things. A single change in any article would involve 
a correction of every list. 

Altogether, then, it is clear that exchange of products 
by means of direct barter would be very costly and labo- 
rious. The institutions for making exchanges would 
necessarily be few in number, so that most producers 
would have to travel considerable distances in order to 
get their products exchanged. There would also be a 
danger that the community might have to pay very 
dearly for the services of the exchangers. 



CHAPTEE III. 

THE USB OF MONEY AS A MEDIUM OF EXCHANGE.— 
NATURE OF BUYING AND SELLING. 

1. Money facilitates Exchange. — It is only by consid- 
ering the difficulties attending the use of barter that 
one can get clear views as to the true nature and use 
of money. The great and true service rendered by 
money is, that it makes the exchange of commodities 
easy. 

This it accomplishes in two ways. First, by breaking 
up the exchange into two parts or stages. It substi- 
tutes two comparatively easy exchanges for one ex- 
ceedingly difficult one. The man who wishes to 
exchange a carriage for a coat, a watch, and a barrel 
of flour, first sells the carriage for money, and then 
with the money buys the things he wants wherever 
he can buy them most favorably. This enables the 
work of exchanging things to go on without the help 
of a great central exchange. 

Secondly, money makes exchange easy by making it 
possible to have a price for everything. Instead of 
cumbersome lists, showing how much of every other 
article a thing is worth, we need only to say how 
much money it is worth. Money serves as a standard 
of value. 25 



26 Political Economy. 



2. Exchange is obscured by the Use of Money. — In 

these two ways the use of money renders the work of 
exchanging commodities comparatively easy and expedi- 
tious. But it greatly increases the difficulty of study- 
ing political economy. The use of money gives rise to 
most of the wrong ideas against which political economy 
has to contend. Exchange of commodities is very much 
disguised by it, — so much so, in fact, that many men 
who do a great deal of exchanging never once think of 
it as exchanging at all. They think of selling as a 
thing by itself, and of buying as a thing by itself, — 
not waiting to consider that these are in reality the 
separated halves of an exchange. 

Two circumstances tend to conceal the real nature 
of the case. In the first place, the two halves of the 
exchange are transacted with different persons. The 
man to whom, in our example, the carriage is sold, is 
not the man from whom the watch or the coat or the 
barrel of flour is bought; so that the transaction lacks 
the appearance of an exchange. Secondly, the two parts 
of the exchange may be separated by a considerable 
interval of time. It may suit the convenience of the 
carriage-builder not to buy the watch or the coat or 
the barrel of flour at once. With the money in his 
pocket, he can safely wait. He may in the meantime 
make and sell another carriage, and the money derived 
from the new sale may get mixed up with the other 
money, so that when he buys a thing he could not easily 
tell for which of the carriages he receives it in exchange. 



How Money Obscures Exchanges. 27 

Thus the use of money, while makhig exchange 
easy, has made it compUcated. When men sell things, 
they do not usually think of the particular things they 
are to buy with the money they get. They may not 
have decided yet. Their immediate object is to get 
money. They know that to him who has this, the 
whole market is open. 

Money has been very fitly called " general purchasing 
power," because it can be so readily exchanged for any 
desired commodity. Until the actual moment of pur- 
chase the owner of money is free to choose what he 
ivill have. Yet when he does buy, it is clear that he is 
simply completing the exchange that was begun when 
die obtained the money. The money served as a pledge 
that he should receive an equivalent for the thing sold, 
leavino; him free to choose the time and the form in 
which he should receive it. 

Thus the use of money enables each producer to 
exchange on free terms with the general body of other 
producers, instead of being limited to the particular 
individual who buys his product and to the particular 
moment at w^hich he buys it. These facts disguise 
the exchange, but they do not affect its real character. 
In the end each producer has parted with certain 
things, and has received certain other things in return. 

3. Buying easier than Selling. — There are some 
other circumstances that tend to obscure this funda- 
mental relation between buying and selling. In the 
first place the use of money affects the two halves of 



28 Political Economy. 

exchange very unequally. As there are always stocks 
of goods for sale, the possession of money makes it 
comparatively easy to get what we want. But the 
difficulty of finding the persons who want our product 
remains precisely as great as it would be under a 
system of barter. Thus the chief remaining difficulty 
in making the exchanges is thrown on the side of 
selling. 

There is usually no small difficulty in getting things 
sold at satisfactory prices. The attention of business 
men, producers as well as traders, is thus ordinarily 
fixed on their sales. Every other part of their busi- 
ness they can control, but for their sales they must 
await the pleasure of other men. This is, therefore, 
the part that causes anxiety. A natural result of 
this is a tendency to forget the other part of the 
exchanges they are carrying on, and to view all sorts 
of industrial activity merely as so many different 
ways of' getting money. From this state of mind 
manifold errors spring. 

The student of political economy has made his first 
real step in the science, when he has perceived clearly 
that Ituying and selling are merely the easiest way of 
exchanging products, and that, though buying is so 
much easier than selling, it is not a whit less im- 
portant. In fact, what is selling for one man is 
buying for another. 

4. Function of Traders. — It may occur to the reader 
that there are some facts of daily life which seem to con- 



The Trading Class. 29 

flict with this view of buying and selling. To begin 
with, there is the fact that merchants and traders 
constantly buy and sell the same thing. When the 
cloth merchant has sold his cloth he does not buy 
a stock of other commodities: he buys more cloth. 
In this sort of buying and selling there would seem 
to be no exchange of commodities. But we must 
note the fact that merchants and traders buy of one 
set of men and sell to quite a different set. As a 
class, they buy of those who produce and sell to 
those who consume. The truth, then, is that they are 
the men who manage the exchange of products for us. 

Money allows division of labor to be used in ex- 
change as well as in production. Instead of one great 
central place of general exchange, money enables us 
to have many small establishments, in each of which 
some part of- the work is done. Each dealer devotes 
himself to trading in some one commodity, or in a 
limited number of commodities. His buying and 
selling are part of the process by which commodities 
find their way from the farms, mines, factories, and 
mills where they are produced, to the hands of those 
who are to consume them. 

Things are usually bought and sold at least three 
times in passing from the producer to the consumer, 
The manufacturer sells to the wholesale dealer, the 
wholesale dealer to the shopkeeper, and the shop- 
keeper to the consumer. In some trades there are 
several other intermediate changes of ownership. 



30 Political Economy. 

These transfers from dealer to dealer are for con- 
venience and economy. They simplify the operations 
of each dealer, and are commercially of great impor- 
tance. But for political economy they have little 
significance beyond their effect in lessening the labor 
of carrying on exchange. In all respects except that 
of economy and convenience the man who buys of 
the producer might be the same who sells to the 
consumer. These are the essential transactions in 
economic exchange ; all the intermediate transfers are 
merely helps towards making these easy. 

5. Buying and Selling do not create Wealth. — The 
gains made by buying and selling are often very large, — 
so large that many think of buying and selling as the 
true source of wealth. But one who reflects at all 
readily sees that mere buying and selling can produce 
nothing. Individuals may grow rich by fortunate opera- 
tions of that kind ; but the whole community cannot 
do so. The general wealth can be increased only by 
producing more or by saving more. 

If all the commodities in the world were bought and 
sold fifty times in a day, with a rise of price at each 
new sale, the world would be no richer at the end of 
the day than it was at the beginning. Some indi- 
viduals might no doubt be richer; but others would 
be poorer by the same amount. 

6. Speculative Buying and Selling. — Every change in 
the price of an article usually brings gain or loss to 
those who happen to have stocks of it on hand. Such 



Speculators, 31 



changes are an unavoidable evil. They disturb the 
course of trade and production. The opportunities they 
pr3sent for making large and sudden gains give rise, 
in every community, to a class of men called specu- 
lators. 

Speculators perform no necessary part of the work) 
of exchange. They carry things no step forward from' 
the producer to the consumer. They merely aim to 
profit by the fluctuations of the market. By buying 
things that are about to rise in price, and selling 
again after the rise, they are able to gain the differ- 
ence If prices were steady, they would have no basis 
for their operations. 

So far as speculators merely anticipate the natural 
course of the market, their operations are entirely legit- 
imate, and even at times beneficial to the community. 
By buying in seasons of plenty and carrying over a 
stock that might otherwise be partly wasted, they some- 
times help out the deficie'ncy in seasons of dearth. But 
when, for purposes of gain, they impose on the igno- 
rance or timidity of their neighbors, when they resort 
to knavery and deception, — when, by combinations 
and "corners," they create artificial fluctuations of the 
market, — they become enemies of honest industry and 
a burden to the community. 

7. Some appear only as Buyers. — There is another 
circumstance which seems to conflict with the view that 
buying and selling are at bottom exchange of commodi- 
ties. Many persons appear only as buyers. They have 



32 Political Uconomy. 



nothing to sell, for they produce nothing. The large 
class who live in idleness are in this position. Also the 
more numerous class who, though doing useful service 
in other ways, take no part in the production of com- 
modities. Even the hired laborers, who do the chief 
work of production, appear in the market as buyers 
only. How, then, shall we maintain the doctrine that 
buying and selling are mainly exchanging of things? 

As it is of the highest importance that the beginner 
shomGt^^uitQ j3lear on this point, let us consider these 
cases. First the case ot the idl-^rs. It is obvious that 
these, in order to be able to buy anything, must have 
an income from some source. Some of them own 
estates of land and receive rents from their tenants ; 
others own buildings or building-lots in the cities ; 
still others hold bonds, mortgages, railway stocks, etc. 
Their income from these sources is now commonly 
paid in money. But this is merely for the convenience 
of all concerned. If there were no money in the 
world, there would still be farms and city lots and the 
various other forms of property named. The rents, 
however, would have to be paid in commodities : so 
many bushels of wheat, so many tons of coal, so many 
yards of cloth. 

In some countries rent of land is actually paid in 
products of the land itself. If all rents, dividends, and 
interest were paid in commodities, the objection we 
are considering would not be thought of. The persons 
receiving income from such sources would receive it 



Buying is Exchanging, 33 

either in the precise commodities they happened to 
need for their own use, or in other things. If 
they received the things needed for their own use, 
they would not appear in the market at all : they 
would be neither buyers nor sellers. If, on the 
other hand, they received things unsuitable for their 
own use, they would appear in the market both ' as 
sellers and as buyers. It would then be clear that 
their purchases are in fact part and parcel of the 
general exchange of commodities. 

At present the troublesome half of their exchange 
is done for these persons by those who pay them 
rents, interest, or dividends. Others are compelled 
to sell more than they buy by the full amount of 
the money paid to the receivers of rent, interest, 
and dividends. If those others were allowed to 
spend the money for themselves, their buying would 
simply be equal to their selling, and there would 
be no difficulty in perceiving the reality of the 
exchange. That they hand over a part of their 
buying power to their landlords and creditors does 
not change the essential features of the case. Their 
landlords and creditors simply, complete exchanges 
whereof the difficult half has been done already. 

The same remarks apply to all payments of money 
in the form of tees, salaries, and wages. Men 
nominally work for money, but in reality they 
work for commodities. By getting paid in money, 
they really get the commodities, without any danger 



34 Political Economy. 

of disputes about quality or kind, and without the 
trouble and risks attending the difficult half of ex- 
change. 

If each laborer were paid in the product of his 
own labor, he would run great risks of loss and 
suffering in the effort to sell it. The arrangement 
whereby laborers receive money for their labor frees 
them from all that trouble and risk. The employer 
does the selling for them. His purchases of com- 
modities fall short of his sales by the whole amount 
of the laborers' purchases. Their buying simply 
completes the exchange that his selling begins. 

8. Money and Prices. — Since the final object of 
all our industrial exertions is to obtain enjoyable 
commodities or services, it follows that the amount 
of money we receive does not, of itself, determine 
our reward. In order to know how much we are 
receiving for our labors, we must also know the 
prices of the things we wish to buy with the 
money. If the prices be fixed, any increase of our 
money income means a corresponding increase of 
our real rewards. Similarly if our money incomes 
be fixed, a fall in the prices of the things we buy 
means a corresponding increase of our real rewards. 
But an increase of onr money income, accompanied 
by an equal rise in the prices of the things we 
buy, would leave us no better off than before. 

These are important principles and need to be 
steadily borne in mind. Many speak and act as if 



Our Money not our Pay. 35 

mere increase of money were, in and of itself, a 
general blessing. But to one who reflects at all, 
it must be clear that what we need in order to 
have an increase of the general wealth is not more 
money, but more commodities. If every person's 
money income were doubled, without any increased 
production of commodities, nobody would be better 
off than before. 

QUESTIONS AND EXERCISES. 

1. Describe the advantages arising from division of labor. 

2. Show that the trouble of exchanging products is a disad- 
vantage attending division of labor. 

3. Could exchange be carried on by barter ? 

4. Show how the use of money facilitates exchange. 

5. How does the use of money disguise the exchange of 
products ? 

6. Why is it usually so much harder to sell than to buy? 

7. Trace carefully the exchanges of products in the following 
cases : 

(a) A farmer receives $25 for wheat, uses $20 of the amount to 
pay his debt to the coal-dealer, and with the balance buys a dozen 
of spoons. 

(b) The coal-dealer pays the $20 to his bookkeeper, who buys 
with it a suit of clothes from the tailor. 

(c) The tailor \ises the money to pay his house rent, and the 
owner of the house buys a watch with it. 

8. A teacher receives her salary from the town treasury and 
spends half of it in buying books and deposits the balance in a 
savings bank. [Consider the tax-payers as well as the teacher 
and the book-sellers.J 



CHAPTEK IV. 

OF WEALTH AND THE DISTINCTION BETWEEN NATURAL 
WEALTH AND WEALTH PRODUCED BY LABOR. 

1. Wealth consists of Material Objects. — It has been 
stated that the word " wealth " is simply a short 
name for the numberless things we all like to have 
and to own. It is now necessar}^ to define wealth 
somewhat more fully, in order that there may be 
no misunderstanding as to the nature and extent of 
our subject. 

The first point to be noted is that the wealth 
of which political economy treats is material wealth. 
The things comprised in it are material objects. Our 
invisible possessions, our powers of body and mind, 
even those of them that come into play in getting 
material wealth, are not themselves included in the 
definition of our wealth, since they are rather part of 
ourselves than of our worldly goods. The wealth we 
speak of in political economy is such as one may 
part with at will. Therefore we exclude our personal 
gifts and attainments, such as knowledge, intelligence, 
skill, good health, physical strength, social position, 
a good name, the love of friends, and the like. 

This implies no contempt for these unseen possessions, 

36 



Wliat our Wealth Includes. 37 

which are, in fact, far more important and precious 
tlian mere material wealth. We only mean that 
political economy does not undertake to deal with 
them. It wisely confines itself to the humbler task of 
considering those material things that men need for 
the support of life, or desire as aids to comfortable 
living. 

2. Useless Things are not Wealth. — Wealth, then, 
consists of material objects ; but not all material objects 
are wealth. Things that have no known use for us, 
things that nobody wants, are not wealth. This 
principle excludes from wealth a large part of the 
material objects in the world. It applies not only to 
useless things found in nature, such as desert lands, 
useless rocks, weeds, noxious animals, etc., but also to 
products of labor that are worn out or have proved to 
be useless. 

Of course a thing may have useful properties not 
yet discovered. To men who are ignorant of the 
good in it, it is not wealth. Thus wealth depends on 
knowledge. The metallic ores were not wealth till 
men learned to smelt and forge them. Linen rags 
were not wealth till men learned the art of making 
them into paper. We cannot tell how many sub- 
stances now regarded as useless rubbish may become, 
through new discoveries, valuable portions of the 
world's wealth.^ 

1 The words useful and useless, as here employed, have no 
necessary reference to any real or intrinsic usefulness. A thing 



38 Political Economy. 



It may be well to add that wealth implies posses- 
sion, or the ability on the part of somebody to have 
the use of it. Therefore things that are beyond our 
reach are not wealth. Mineral beds that lie too deep 
to be dug up, treasures at the bottom of the sea, game 
that is too wary to be caught, are examples. Here 
again new discoveries and inventions may bring within 
our reach things that have hitherto been of no use to 
us because unknown, or regarded as inaccessible. 

Our wealth, then, consists of all the useful and 
agreeable material objects we own, or have the right 
to use and enjoy without asking the consent of any 
other person. 

3. Rights over Human Beings are not Wealth. — We 
have seen that a man's powers of body and mind are 
not included in his wealth. Much less can they, in 
any case, be regarded as the wealth of another. Men, 
the owners of wealth, can never themselves be 
regarded as mere wealth, even when reduced to a 
state of slavery. To the slave-owner, indeed, the 
possession of slaves may be a source of income ; it 
may suit him in his pride of mastery over his fellow- 
men to regard them as his property. But to adopt 
that view would be to forget the poor slaves, who 
are members of the community, with as good a 
claim to be considered as the master has. All that 

is useful, in tlie sense liere intended, if it is an object of desire 
to any portion of tlie luiman race. It may be in itself strictly 
worthless, or even injurious to those who use it : tlie fact that 
men desire to have it makes it a part of wealth. 



Bights over Men not Wealth. 39 

the master gains by the existence of slavery they 
lose. If he is richer by reason of his power to exact 
their service, they are poorer to the same extent by 
the loss of their freedom and the products of their 
labor. Therefore, in any country where slavery exists, 
the wealth of the community as a whole would not be 
lessened by freeing the slaves ; nor, in free countries, 
would it be increased by making one part of the 
population slaves ' of the other part. 

The same principle applies to all other claims and 
rights of one man over the person or the property 
of other men. Debts of all kinds, as well as all 
mere proofs of debt, such as notes, bonds, mortgages, 
etc., must be excluded from our idea of wealth. 
They merely show to whom the wealth belongs, or 
will belong when the debts are paid. If every debt 
were forgiven, and every bond, note, and mortgage 
were cancelled, we should still have precisely as 
much wealth in the country as we had before. We 
create no riches by getting into debt or by writing 
mortgages on our property. 

4. Natural Wealth and Wealth produced by Labor. — 
The wealth of the people of the United States is 
of two general kinds. Partly it consists of what 
remains of the natural resources that originally 
fitted our country to be the home of a civilized 
nation. This part, which we may call our Natural 
Wealth, our forefathers acquired for themselves and us 
simply by coming over the sea and taking possession; 



40 Political Economy. 



it cost no labor beyond the trouble of taking and 
holding it. The other part of our wealth consists of 
products of human industry, — things for which, or 
upon which, labor in some form has been expended. 
This part we may call Wealth produced by Labor. 

Natural wealth includes the land, with its sponta- 
neous growth of forest-trees, etc., its bearing capacity 
under tillage, and its varied uses as our home ; also 
all such things as deposits of coal, iron, and other 
useful metals and minerals; water and water-power; 
electricity ; the expansive force of steam, and all other 
physical forces ; harbors and navigable rivers ; fisheries, 
wild game and the like ; a pleasant and healthful cli- 
mate ; a favorable position for commerce ; — in a word 
every resource and advantage of a material kind be- 
stowed on men by the beneficence of the Creator. 
We must also include in natural wealth some things 
that ordinarily come to us so freely, without care or 
effort on our part, that we rarely give them even a 
thought. It may seem strange, at first, to give the 
name of wealth to air, water, and sunlight; but they 
are surely among the most important things in the 
world, as anybody quickly discovers who is cut off 
from adequate supplies of them. That they come to 
us so easily would be a poor reason for excluding 
them from the list of things constituting our natural 
wealth. 

The modes in which natural wealth is useful are 
highly varied; it would be difficult to mention all 



Two General Divisions of Wealth. 41 

of them. Some things are directly useful to us just 
as we find them and where we find them ; e. g. air, 
sunlight, and (merely as a lodging-place) land. Other 
things are made useful by merely bringing them to 
the place where we need them; for example, coal 
and other fuel, mineral oil, game, fish, etc. Other 
things serve mainly as materials for the production 
of useful commodities ; e. g. metallic ores, wool, 
cotton, silk ; skins of animals, woods other than fuel, 
marble, etc. Still other parts of natural wealth are 
useful chiefly as necessary agents in the production 
of commodities or materials, or as aids in producing 
and transporting commodities and materials from one 
place to another ; e. g. the soil, the motive power of 
wind, water, and steam, and the various physical 
forces that come into play in the growth of plants 
and animals. 

Wealth produced by labor includes all useful 
things that have been prepared for use by exertion 
of any kind on the part of men ; for example, 
houses, furniture, pictures, food, clothing, horses, and 
other domestic animals, machinery, ships, railways, 
money, etc. 

Land in its wild state, fishes in the sea, coal in 
the seam, trees in the forest, belong to natural 
wealth. Cultivated farms, fish that has been caught, 
coal that has been mined, lumber that has been cut, 
belong to wealth produced by labor. 

5. The Nature of Production. — Obviously natural 



42 Political Economy. 

wealth is the basis or source of all wealth produced 
by labor. Men create nothing. They can only make 
use of the materials, forces, and opportunities they 
find in the world about them. Strictly, what we call 
Production consists, so far as men are concerned, in 
moving things or parts of things from one place or 
position to another. (Jonsider carefully, for example, 
what men do in building a house, or in making 
clothes, or in procuring food, and you will perceive 
that it is confined to moving things, or placing 
things in particular ways. The so-called forces of 
nature do the rest. Men plough the ground, sow the 
seed, and harvest the crop, but without the germi- 
nating principle in the seed itself, and the nourishing 
influences of sun, rain, and soil, the united labors 
of the whole human race could not avail to pro- 
duce a grain of wheat. 

In some cases the work of production consists 
more obviously of moving things than in other cases. 
In the production of beef, for example, it is only by 
an effort of thought that we perceive the exact nature 
of men's contribution to the product. But in the case 
of producing coal, lumber, fish, ice, and the like, we 
perceive it very readily. The reason is that in the 
latter case nature's work is, so to say, completed 
before man's part begins ; whereas in the other case 
man's work and nature's work go on simultaneously, 
and men easily take credit to themselves for more 
than they actually accomplish. 



CHAPTEK V. 

WHY NATURAL WEALTH, ORIGINALLY A GIFT TO MEN. 
CANNOT ALWAYS BE OBTAINED FREE OF COST. 

1. The Supply of Natural Wealth. — Different kinds 
of natural wealth differ very much in point of 
copiousness of supply. Some forms of it are found 
in practically unlimited quantity in every part of 
the habitable globe : the air is an example of this. 
Other kinds are found in abundance in particular 
neighborhoods, while in other places little or none 
is found : coal, petroleum, and most of the metals are 
examples ; also the distinctive natural products of par- 
ticular zones of the world. Still other kinds of natu- 
ral wealth are found in but few places and in but 
small quantities : of these gold and silver, diamonds 
and other precious stones are examples. 

Again it usually happens that not all portions of 
the supply in any given region are equally desirable. 
In some cases the differences relate to quality, in 
other cases to ease of access or convenience in use ; 
in still other cases some portions of the supply 
combine several kinds of superiority over other por- 
tions. There is usually, therefore, a descending scale of 
excellence from the best to the poorest in the case of 

43 



44 Political Economy. 

each species of material wealth in any given region. 
Further, the best and really desirable portions are in 
most cases very limited in supply as compared with 
the less desirable portions. 

These facts are most clearly seen in the case of 
Land, one of the most important parts of natural 
wealth. The whole area of land in the world is very 
great, but different portions of it differ very much in 
point of fertility, convenience of situation, nearness to 
the great centres of population, etc. Further, the 
amount of really excellent land, excellent in all 
respects, is very limited in comparison with the 
amount of indifferent and distinctly poor land. Be- 
tween the two extremes, the best and the utterly 
useless, there is an infinite variety in lands, one 
piece differing from another by a very slight balance 
of advantages. 

2. The Demand for Natural Wealth. — The demand 
for natural wealth in any region depends partly on 
the number and partly on the character of its 
inhabitants. The demands of a civilized people are 
very different from those of a savage one. In one 
sense at least the savage has a larger demand for 
natural wealth than the civilized man. He must 
have a wide range of territory for his hunting and 
other crude pursuits, otherwise he cannot find a 
subsistence. His demand is, so to say, a wasteful 
one : he must have much more natural wealth than 
he uses. He remains poor and squalid in the midst 
of overflowing natural wealth. 



Natural Wealth. 45 



The civilized man, on the other hand, has a stronger 
demand for material wealth than the savage. There 
is no known limit to his demand for natural wealth, 
except his physical ability to make use of it. His 
demand is, however, much more intelligent than that 
of the savacre. He seeks out all the various resources' 

O 

of his region, and endeavors by labor to turn all the 
best of them to account. A civilized community may, 
therefore, live and flourish in a region where a savage 
community one-tenth as numerous would perish of 
want. 

Given the character of the inhabitants of a country, we 
may safely assume that the demand for natural wealth 
will increase with the increase of population. The 
more persons there are to be supplied, the greater the 
amount needed to satisfy them. This does not mean 
that the demand for each kind of natural wealth must 
increase in the same proportion : trade between different 
regions and countries modifies the particular direction 
of the demand in each case. England, for example, 
draws her supply of wheat largely from the United 
States. This increases in our country the demand for 
wheat-growing lands, and diminishes the demand for the 
sources of materials needed for the production of the 
things we get in exchange for the wheat. In England 
there is a lessened demand for wheat-growing land, and 
an increased demand for the natural wealth needed for 
the production of the articles she gives us in exchange. 
Still, it is clear that an increase of population involves, 



46 Political Economy. 



in every country, an increased demand for some form, 
and usually for all forms, of natural wealth. 

3. Natural Wealth is gratuitous while the Supply 
exceeds the Demand. — Natural wealth is originally a 
gift to the human race. The first owner, whether a 

•government or an individual, gets it in all cases for 
the mere trouble of taking it. So long, in any 
region, as there is enough of any particular kind 
of natural wealth to satisfy the whole desire of every- 
body for the possession of it, that particular kind can 
be obtained free of cost by everybody. No man would 
pay a price for a given portion of it, if other portions 
equally desirable were still to be had out of nature's 
free supply. Therefore natural wealth that is found 
everywhere in unlimited quantity and of uniform 
quality, — air, for example, — can never cost any man 
anything. There are, no doubt, special circumstances 
in which men find themselves cut off from the natural 
supply of air, in which, therefore, laborious contrivances 
have to be used for conveying fresh air to them. But 
fresh air in a crowded hall, or in a mine, or in a 
diving-bell, is brought there by the use of labor: is, in 
fact, a product of labor quite as truly as coal in our 
bins or ice in our reirigerators is a product of labor. 
The contrivances for conveying it cost something ; but 
the air itself required for the purpose costs nothing. 

4. Natural Wealth acquires a Price when Demand ex- 
ceeds Supply. — Natural wealth that is limited in supply 
can also be obtained free of cost wherever the supply. 



Natural Wealth. 47 



though limited, exceeds the demand. But so soon as, 
owing to increase of population, the demand for any 
given kind of natural wealth becomes greater than 
the supply, that particular kind passes into the list 
of things for which a price must be paid. Those who 
wish to get it must induce some holder of it to part 
with his holding, by the offer of something else in 
exchange. 

It may seem, in such a case, that the cause of the 
price is the fact that certain persons hold the whole 
supply and refuse to part with it without payment. 
But the true cause is the greatness of the demand. 
If the whole supply were again thrown open to 
everybody free of cost, or were shared equally among 
all seekers, the article would still command a price, 
because (on the supposition that the demand exceeds 
the supply) there would still be some persons de- 
sirous of getting more than the equal sharing would 
give them ; and they would be ready to pay some- 
thing to other holders for their share. 

Since most kinds of natural wealth are found in 
varying degrees of excellence, only the better grades 
or specimens of each have a price at first. So long 
as the next inferior grade exceeds the demand for it, 
it will remain gratuitous ; and the price of the better 
grade will be limited to the value of the difference 
between them. 

Since the population of most parts of the United 
States is increasing, we find, as we should expect 



48 Political Economy. 

to find, that many things which could formerly be 
obtained free of cost, or at a merely nominal price, 
are now no longer so obtainable. Also since the 
ratio of population to natural wealth differs greatly 
in different parts of the country, we find that some 
iorms of natural wealth which cost little or nothing 
in one part, have a considerable price in other parts. 

Of course in the case of transportable things, this 
difference of price could not ordinarily exceed the 
cost of transportation. But the cost of transportation 
is itself considerable, especially in the case of bulky 
and heavy articles such as make up so large a part 
of natural wealth (e. g. coal, wood of all kinds, build- 
ing-stone, metallic ores, etc.). Again some kinds of 
natural wealth are not transportable. Land, for ex- 
ample, cannot be carried from regions where it is 
cheap to places where it is dear. It therefore happens 
that land, especially land for building purposes, may 
have a very high price in one place and a very low 
one in another. A single square yard of land in the 
central parts of New York, or Chicago, costs more 
than a square mile in some parts of the world. 

5. Some Exceptional Cases. — There are a few forms 
of natural wealth that never acquire a value in ex- 
change, however far the supply of them may fall 
short of satisfying the demand. In certain cases this 
is because the nature of the thing is such that many 
persons can use it in common without interfering 
with each other, and the laws of civilized countries 



Natural Wealth. 49 



give the right of use to everybody free of charge: 
harbors and navigable rivers are examples. In the 
remaining cases the failure to acquire exchange value 
is due to the fact that the natare of the things 
themselves renders it impossible for them to be 
bought and sold. Eain, for example, would bring 
a high price in some countries at almost any time, 
and in every country at particular times. But rain 
is a form of natural wealth that cannot be transferred 
or diverted from one man's fields to those of another, 
or from one re2:ion to another. The same is true of 
all other elements that go to form the climate of any 
region. Those who would have the benefit of them 
must go where they are found, and found only as 
gratuities of nature. 

Though harbors, rivers, climate, scenery, and the like 
have no exchange value of their own, it is obvious that 
they may affect very much the value of other kinds 
of natural wealth, — especially that of land. It is 
well known that land lying near to harbors and navi- 
gable rivers has a higher value than land, equally 
good as land, which is remote from such facilities. In 
the same way a good climate, including regularity and 
sufficiency of rainfall, tends to attract men to the 
regions enjoying those advantages. The resulting in- 
crease of demand for the natural wealth of those 
regions must, of course, tend to raise the value of such 
parts of it as can have exchange value. 

6. The Rising Value of Natural Wealth no general 



50 Political Economy. 



Gain. — "When a useful thing, formerly without exchange 
value, acquires a value in exchange by reason of an 
increase of demand, it is well to observe that the com- 
munity as a whole gains nothing by the change. The 
persons who own the existing supply of the article are 
benefited, but their gain is at the expense of the rest 
of the community. The change implies, in itself, no 
increase of the actual things owned and enjoyed by 
the community as natural wealth. There is simply an 
increase in the number of persons wanting those things, 
with the result that there is less for each than there 
was formerly. 

If the circumstance that causes any kind of natural 
wealth to acquire an exchange value be a lessening of 
the supply, it is obvious that the community is not 
only not richer, but is even poorer by reason of the 
change. It has, so far as this portion of its wealth is 
concerned, a smaller stock of useful things than before. 
The individual owners of the remaining supply may gain 
by the change. Their gain, however, is at the expense 
of other men. If, for example, the supply of fresh 
water should become so reduced as to acquire a con- 
siderable exchange value, the owners of ordinary springs 
might be enriched; but the general body of citizens 
would be poorer than before. 

When the natural wealth that has been lessened in 
supply is not private, but public, property, nobody 
gains by the change. For example, the diminished 
productiveness of the fisheries has been attended by a 



Natural Wealth. 51 



rise in the value of fish. But this rise is only suffi- 
cient to compensate the fishermen for the increased 
labor required in catching a given quantity. The 
diminished yield is a simple loss to everybody. The 
same principle applies to the present scarcity and con- 
sequent high value of game, forest - trees, fur-bearing 
animals, etc., as compared with early times. 

This last remark suggests the fact that some kinds 
of natural wealth are unavoidably diminished by the 
progress of civilization. The destruction of the forests, 
together with the game and other products of wild 
nature, is necessary in order to fit the land for agri- 
culture ; and it is needless to say that the farms are 
more useful and a greater wealth than the forests they 
have displaced. But it is none the less true that the 
loss of the forests is in itself a loss of wealth. If 
land could be tilled without interfering with the 
growth of trees, we should all be richer, not poorer, 
than we are. Trees for fuel and for building purposes 
could then be obtained, in most places, for the mere 
trouble of cutting them down on the nearest hill-side ; 
whereas at present they have a very considerable ex- 
change value in ail settled regions. 



CHAPTER VI. 

OF LABOR AND ITS PRODUCTIVENESS. 

1. Productive Labor. — Natural wealth, as we have 
seen, is the basis and source of wealth produced by 
labor. Any human exertion devoted to procuring 
or preparing natural wealth for the uses of men, is 
called Productive Labor. 

Productive labor is of many kinds. First and most 
obviously, it includes all the manual labor of preparing 
tools, implements, buildings, and machinery needed in 
production ; of preparing the natural agents (e. g. land) 
and procuring the raw materials ; of working up these 
raw materials into the various commodities of civilized 
life ; and of carrying on the exchange of products 
between the various sets of producers, — including 
herein the necessary labor of transportation. 

Productive labor includes, secondly, all mental efforts 
whose aim is the production of material wealth. Strictly 
there is a mental effort involved even in manual labor 
of the simplest kind. But there are some kinds of 
productive labor in which the exertion is more dis- 
tinctly that of the mind. This is true of the labors of 
merchants, bankers, book-keepers, inventors, managers, 
and all others whose task lies in planning and directing 

52 



Productiveness of Labor. 53 

the work of production and exchange. Such labors 
are necessary in order to carry on production effectively, 
and are as truly productive as is the labor of those who 
come into actual contact with the things produced. 

2. Non-productive Labor. — The greater part of the 
world's labor is directed to the production of wealth. 
But we have many needs besides those that material 
things can satisfy. In infancy and again in old age 
we need nursing and care. In sickness we need also 
the help of a physician. Born ignorant and with many 
evil propensities to overcome, we need much careful 
training, instruction, and (on our own part) study, in 
order to become enlightened and useful men and women. 
As members of civilized society we need the labors of 
legislators, judges, administrators, and other guardians 
of law and civil order. These and many other sorts 
of labor we need not as producers, but as men and 
as citizens of a civilized country. We should need 
them even if the material commodities we require were 
supplied to us without effort or exertion on our part. 
These kinds of labor we shall therefore designate as 
non-productive. 

Incidentally non-productive labor may help in the 
production of wealth. When a teacher reclaims a 
vagrant youth and converts him into an honest laborer, 
or a physician cures the ailment of a producer and 
restores him to his work, or the civil authorities repress 
public disorders, the act has in each case the effect 
of increasing production. But this effect is undesigned, 



54 Political Economy. 



or at most secondary. Besides it would be difficult, 
as well as useless, to distinguish, among acts of this 
character, those that are indirectly productive from 
those that are not so. We shall, therefore, understand 
Productive labor to mean labor whose immediate object 
is the production or exchange of wealth. All other 
labor we sliall regard as Non-productive. 

3. The Productiveness of Labor. — The circumstances 
which determine how great an amount of wealth a 
man may produce by his labor, are too numerous to 
admit of complete enumeration. They are, however, 
reducible, for the most part, to three general classes : 

(«) The working capacity of the man himself, his 
diligence, energy, intelligence, and endurance, go far to 
determine the product. These are points in which men 
differ very much. This is true not only of individuals 
but to a considerable extent of whole nations and 
races. The people of the United States are pre-emi- 
nent for their efficiency as laborers. They are drawn 
mainly from those branches of the human family that 
excel in all the qualities that give success in the pro- 
duction of wealth. Further, the original settlers were, 
in a way, picked men of the nations to which they 
belonged, since none but men of courage and capacity 
would face the dangers and hardships of the long 
voyage and of the pioneer life that it brought them 
to. Of the subsequent migration of Europeans to our 
country, the same remark holds true to a very consider- 
able extent. The more capable and enterprising are 



Productiveness of Labor. 55 

those most ready to come ; the sluggish and shiftless 
usually stay at home. 

(h) The productiveness of a man's labor depends 
largely on the character of the natural wealth he has 
free access to. If that be rich and copious, and all 
the natural conditions be favorable to his industry, his 
product will be large for a given outlay of labor. The 
people of the United States are highly favored in these 
respects. We have ample areas of fertile soil ; for the 
most part we have a favorable climate ; we have 
almost every material and natural facility for produc- 
tion. Compared with the extent of our natural wealth 
of all kinds, our population is small, so that there are 
comparatively few places in which very good resources 
may not be obtained at a low cost. In these respects 
our producers have great advantages over the inhab- 
itants of older and more crowded countries. 

(c) The productiveness of labor in a country depends 
much on the advancement its people have made in the 
arts of production, that is to say, in the discoveries 
and inventions by which the great forces of nature are 
made to aid in the work of production. There are 
some industries, such as the manufacture of cloth, in 
which it is probable that modern machinery enables 
men to produce a hundred times as much as they could 
produce by the old modes of hand-manufacture. In 
every sort of production skilful devices may do much 
to add to the product, or improve its quality. Here 
again the people of the United States have shown 



56 Political Economy. 



great capacity for the invention antl use of machinery, 
and for the discovery of new metnoas of production. 
The intelligence and ingenuity of our laborers have 
been stimulated into great inventive activity by our 
Patent Laws, which secure to every inventor the 
exclusive riglit to manufacture his device for a 
limited number of years. 

In addition to these general causes affecting the 
productiveness of labor, the capacity of a nation for 
properly organizing and managing its industries de- 
serves to be mentioned. The industrial system of a 
civilized country is highly complicated, and calls for 
great skill on the part of those who arrange its details. 
How best to divide and subdivide the work among 
different sets of laborers ; what grouping of the various 
sets is most advantageous ; how the various local re- 
sources may be turned to best account; how large a 
scale of production under a single management gives 
the best results, — these and many similar questions 
must be solved before the labor of a country can 
reach its full capacity for production of wealth. Wise 
and skilful management turns every advantage to the 
best account, prevents waste of labor and materials, 
and thus gives us every commodity for the least pos- 
sible exertion. 

4. WeU-being of the Laborer. — There is one other 
general remark to be made regarding the productive 
capacity of laborers, and that is that the productiveness 
of labor depends much on the state of comfort and 



Well-being of the Laborer. 57 

contentment in which the laborers are maintained. A 
certain degree of comfort is necessary in order simply 
to keep them in physical vigor. But that is as true 
of dumb animals as it is of men. Men are much 
influenced by their state of mind as well as by their 
state of body. It is, therefore, wise, on purely 
economic grounds, to do what may be done without 
injustice to others, to remove real or fancied grievances 
on the part of any class of laborers. Men who are 
satisfied with the conditions under which they work, 
will produce more and better results than men who 
are chafing under a sense of wrong, or have abandoned 
themselves to despair. 

For this reason, as well as on higher grounds, slavery 
is to be condemned. It deprives the laborer of every- 
thing which could spur him to exert his powers. For 
this reason also every other unfair or oppressive treat- 
ment of laborers is contrary to the general interest. 
Cheerful and willing workers are those who produce 
most wealth. 



CHAPTEE VII. 

THE NATURE AND NECESSITY OF CAPITAL. 

1. Contrast between Savage and Civilized Industry. — 

Wherever laborers and natural wealth exist, production 
of some sort is possible. In those parts of the world, 
where, without the aid of human labor, the earth bears 
copious supplies of wild fruits, nuts, and edible roots, 
men may find a rude subsistence without other tool or 
implement than their hands. The production carried 
on by savage races, consisting as it does, for the most 
part, in merely gathering or capturing the spontaneous 
growths of land and water, requires but few imple- 
ments, and those of the simplest character. 

If we compare the production carried on in civilized 
countries with crude production of this kind, we find 
(in addition to other differences) these striking points 
of contrast: First, that civilized production requires a 
large outfit of tools, machinery, buildings, and other 
appliances. Secondly, that civilized production requires 
large quantities of materials, meaning thereby not only 
things in their natural state, but also things that have 
had labor bestowed upon them, — things that have 
passed through one or more stages of production. 
Thirdly, that civilized industry, being carried on by 

68 



Tliree ForTns of Capital. 59 

division of labor, needs to have large quantities of 
finished commodities always on hand, for purposes of 
exchange. 

We see, then, that in order to carry on civilized pro- 
duction and exchange the producers must have the use, 
at any given moment, of the results of much previous 
labor. To these results of past labor used in present 
production and exchange the general name of Capital 
is given. 

2. Three Forms of Capital. — The capital of a country 
consists of three parts, answering to the three needs 
spoken of above. In order to obtain clear views as to 
the nature and uses of capital it will be necessary to 
consider each of these portions separately. 

{a) The plant of production. This includes the 
buildings, implements, and machinery of all kinds used 
in production and exchange. Under this head we in- 
clude also many things which would not ordinarily be 
called machinery ; such as railways, ships, canals, piers, 
and the like. Also we include money, since it is a 
product of labor used in the exchange of products. 
Also we must include the changes wrought by labor 
in the land in order to prepare it for use in produc- 
tion. The land itself, in its natural state, is not capital, 
because it is not a product of labor. The capital used 
in agriculture includes, besides buildings and imple- 
ments, everything by which a farm differs from a 
forest. That is to say, the improvements in land are 
capital, though the land itself is not. 



60 Political Economy. 



(h) Secondly, materials of production on which, or 
for which, labor has been spent. This brings us again 
to the fact that the production of a commodity is in 
most cases not a single act, but a succession of acts. 
To make a table includes cutting down the tree, sawing 
it up, drying the boards, dressing the pieces to the 
required shapes, and finally fastening them together in 
the form of a table. To make a coat involves raising 
the wool, combing and spinning it, dyeing the yarn, 
weaving it into cloth, fulling the cloth, and finally 
making it up into the desired garment. 

Now, under division of labor, we must have all these 
operations going on at once. The saw-mill must have 
logs on hand ; the drying establishment must have 
boards on hand getting dried ; and the cabinet-maker 
must have a supply of seasoned stock on hand to 
select from. The spinner must have wool on hand ; 
the dyer must have yarn in his vats ; the weaver 
must have an assortment of dyed yarns ; the fuller 
must have unfuUed cloth on hand ; and finally the 
tailor must have a supply of various kinds and pat- 
terns of cloth to draw on in order to suit the tastes 
of those who want coats. 

If anybody doubts that these products of past labor 
are necessary in order that the labor of to-day may go 
forward, let him imagine how things would stand with 
the cabinet-maker, if he had to wait till the tree, cut 
down this morning, should be ready for making up into 
tables ; or how it would fare with the tailor and the man 



Commodities seeMng Exchange. 61 

who wants the coat, if they had to wait for the cloth 
to be woven, and the weaver had to wait for the 
yarn to be spun, and the spinner had to wait for 
the wool to be grown. 

As all producers are to work every day, each, except 
the first in each series, must have a supply of his 
proper material to work upon, and this supply must 
have been prepared for him by previous labor on the 
part of those performing the earlier stages of the work. 
It is obvious also that in all cases where other things 
are needed besides machinery and the material operated 
on, these too must be provided in advance. The most 
common example of this is fuel for the engine. 

Materials on which, or for which, no labor has been 
expended, are not capital. Coal in the furnace -room 
of a mill is capital, but not so coal in its native seam. 
Logs in the timber-pond are capital, but forest -trees 
are not. The crop growing on a farm and the cattle 
on a ranch are capital ; but the fishes in our rivers 
and lakes and the wild animals in our forests are 
not. 

( c ) Capital in commodities seeking exchange. — The 
third form of Capital is connected with division of 
labor. It consists of commodities awaiting exchange. 
The difficulty of selling products has already been 
spoken of. We are not here concerned merely with 
the labor it involves, which is greater in many cases 
than the labor of actually producing the articles. 
The chief point to notice at present is that, in order 



62 Political Economy. 



to carry on exchange of products, we need to have 
great masses of commodities of all kinds continually 
on hand in the stores and warehouses. These com- 
modities are capital, products of labor used in ex- 
change. Production cannot go on without them. 

Inventions have done much to cheapen the pro- 
duction of things ; but, beyond diminishing the cost 
of transportation, little has been done to cheapen ex- 
change. In fact, considering the tendency of recent 
times to erect very costly buildings for use as stores 
and shops, and to multiply the number of them 
everywhere, we may fairly question whether exchange 
has been cheapened at all. 

Just how great a number of shops, and how great 
supplies of finished commodities displayed in them, 
may be necessary for carrying on exchange in the 
most economical way, it would be impossible even 
to conjecture. It is only evident that we need here 
a large accumulation of products of past labor, and 
that the more the community is willing to pay for 
convenience and sumptuousness of service in its buy- 
ing and selling, the more numerous and costly and 
fully stocked the stores and shops will be. 

3. Production in Progress. — Viewing now the pro- 
ductive system as a whole, and at work, we may 
think of its results as a stream of commodities 
flowing day by day into the reservoirs of trade, 
and through these into the homes of the people. 
This stream is made up of many smaller streams, — • 



Capital is Consumed. 63 

each industry contributing its quota to the flow. Con- 
tinuing the figure, we may say that each of these 
lesser streams has at its fountain-head the laborers 
who draw the original materials from the earth ; the 
other laborers in the industry, each in his place, 
are engaged in forwarding and transforming these 
materials, stage by stage, towards the final form in 
which they are to be received by the consumer. 

Out of the reservoirs of trade every, man receives 
the reward of his exertions, — the daily food, clothing, 
and whatever of other comforts and luxuries he may 
have earned. The larger the stream of products the 
more the community will have to divide and enjoy, — 
for everything in it goes to somebody. How each 
man's share is determined, we shall consider later. 

4. Capital is Consumed. — It follows from the nature 
of the uses Capital is put to that it is perpetually 
undergoing transformations. The portion that consists 
of materials is in a constant state of change until 
it eventually is carried as finished commodity into 
the stores and shops ; from here it sooner or later 
passes into the hands of the consumer and ceases 
to be capital. But it is replaced, in the natural 
course of production, by new materials and new 
products coming forward all the time by the action 
of the producers. Once, provided with capital and 
started on its present basis, production itself keeps 
up the stock of capital, so far as the portions 
consisting of materials and of commodities awaiting 



64 Political Economy. 

exchange are concerned. We could not produce the 
kmds of commodities we do produce, and use 
division of labor, without creating these forms of 
capital, even if they did not exist before. This is 
simply putting in other words the proposition that 
capital is necessary for civilized production; it is in 
fact inseparable from it. 

As to the other portion of capital, which consists 
of machinery,, buildings, railways, and the like, the 
case is somewhat different. This form of capital is 
also consumed, but more slowly than the other 
portions. The machinery wears out, the buildings and 
ships decay. These, however, are not inevitably and, 
as it were, unconsciously replaced by the mere course 
of production itself. A portion of the labor of the 
country has to be diverted from the work of directly 
producing commodities, to the work of providing the 
tools, machinery, and other equipment designed to 
assist that production. 

Fixed and Circulating Capital. — The gi-eater lasting power of 
machinery, buildings, etc., has led economists to distinguish this 
portion of Capital as Fixed, the remainder being designated as 
Circulating Capital. The latter includes all parts of capital that 
are consumed at a single use : e. g. the wool used by the spinner, 
the grain used by the miller, the fuel used for the engine, etc. 
On the other hand, all tools and implements belong to Fixed 
Capital, on the ground that they are not used up at a single use. 
The distinction is not important except so far as it bears on 
the law of wages, and for this purpose it is far from covering 
the whole principle with which it is connected, viz., the element 
of Time in production. 



CHAPTEE VIII. 

CAPITAL REPRESENTS INDUSTRIAL IMPROVEMENTS. 

1. The Capital of To-day a Legacy. — The present 
generation inherited from the one just preceding it 
a productive system equipped with materials and 
machinery. The same is true of every other 
generation of men since the dawn of history. Each 
inherited capital from its predecessor. The propor- 
tion of capital was undoubtedly smaller in early 
times than it is now; but our ancestors, as far 
back as we know anything of them, had industrial 
knowledge and capital for turning it to account. 
As men's knowledge increased, and improved ways 
of using the productive forces were invented, 
additions have been made to the world's capital, 
until it is what we find it. To those who already 
have capital, increase is comparatively easy. With 
the old tools new ones can be made. But how 
did the progenitors of our race produce their first 
capital ? 

2. The Beginnings of Capital. — The only answer 
we can give to this question is to consider briefly 
the circumstances in which a community would 
naturally become possessed of capital. We must sup- 

65 



66 Folitical Economy. 

pose some member of tlie community to liave discovered 
a new and better way of getting food, clothing, or 
some other needful thing, — ; which new way promises 
larger returns for labor, but at the expense of wait- 
ing longer than hitherto for the finished product 
to appear. Without this knowledge there would be 
neither motive nor room for the existence of capital. 
In the second place, we must suppose the community, 
or some of its members, to have spare time and 
strength left over after providing for their daily 
necessities ; otherwise they could produce no capital, 
since the production of capital requires the expendi- 
ture of labor in some way that promises no imme- 
diate result good for human use. In the third place, 
they must be diligent and enterprising enough to use 
this spare time in the manner their new discovery 
suggests, for the sake of the future benefit it promises. 

Given these conditions, capital will inevitably spring 
into existence. 

3. Capital may be created by working for the 
Future. — As to the precise mode of creating capital 
in such a case, there would be several alternatives 
open. It may help to clear up our notions regarding 
the nature of capital, if we consider these alternatives 
briefly. Taking as primitive a case as possible, let us 
imagine a community that has subsisted hitherto on 
roots, nuts, berries, and such varieties of fish and game 
as can be captured without laborious contrivances of 
any kind. 



How Capital may he created. 67 



Supposing now that a member of this community, 
by happy accident, discovers the superiority of some 
particular root, say the potato, when grown in 
loose soil, in an open place where it has plenty of 
sun and no weeds to retard its growth, over the 
same plant grown in the hap-hazard way of wild 
nature. To make use of this discovery will require 
much preliminary labor in clearing the ground, gath- 
ering good specimens for seed, planting them and 
protecting them while they grow, weeding, etc. 

This is a case in which, I think, the work would 
naturally be done little by little, in the spare time 
left over after providing for daily wants.^ It would 
naturally be tried on a small scale at first, in order 
to be quite sure that the discovery was a real 
advantange, — worth the labor of putting it into 
practice: As each successive crop showed more and 
more conclusively the value of the discovery, a 
larger area would gradually be cleared and planted, 
until finally the raising of potatoes became a regular 
source of food supply. In this case the improvement 
of the land, the necessary seed,^ and, in its season, 
the growing crop, would be capital. 

If, instead of an agricultural discovery, the new idea 

1 We may suppose the daily consumption to be reduced in order 
to gain time for the new work, — if such reduction be possible. 

2 The land itself, as already stated, is not Capital, — not 
being a product of human labor. By the "improvement of the 
land" we mean the changes made in or upon it by labor, with 
a view to production : for example, the removal of trees, levelling 
the hillocks, plowing, fencing, etc. 



68 Political Economy. 

happened to be the construction of a weir for capt- 
uring fish by the flow and ebb of the tide, the same 
mode of procedure would be open. The labor of con- 
structing the weir' could be done in whatever time 
could be spared from getting food and other neces- 
saries in the old way, — partly, perhaps, by stinting the 
consumption of these things in order to have more time 
for the new work. The weir would, in this case, be 
the resulting Capital. Till finished, it would of course 
add nothing to the daily food supply. 

4. Capital may be created by Saving. — It is obvious 
that, in both of these cases, the man making the 
improvement might proceed differently. He might 
begin by saving up a supply of food obtained in the 
old way, by working harder and perhaps consuming- 
less than usual, in order to be able presently to devote 
his time entirely to the work of making the improve- 
ment. This course, however, would be less likely to 
be adopted than the other, both because it seems to 
call for more energy and self-denial than the other; 
and because the kinds of food accessible in such a case 
as we are considering, are hard to preserve for any 
length of time, and always lose something by keeping. 
If it should be adopted, the store of food and other 
necessaries would ordinarily be called capital. For, 
though not strictly used in production, it is accumu- 
lated for a productive purpose.^ 

1 If such a store were used merely as the means of living for a 
time in idleness, it would not be Capital. 



How Capital viay he created. 69 

We shall see later that in an advanced state of 
society, the more common mode of creating new 
capital is by thus saving the means of support for 
laborers in advance. But it is never the sole mode. 

5. A Third Alternative. — If, instead of a single 
producer, several producers should unite to make the 
improvement ; or if the single producer should have 
dependents or slaves to assist him, still another 
method would be open. Some of those concerned 
could devote their time entirely to the new work of 
creating capital, while the rest provided, by the old 
way, enough of the necessaries of life for the whole 
number, until the new method of production began 
to yield its returns. For a time they would have 
to work harder than formerly, or consume less than 
formerly, or both, in order to obtain the capital 
necessary for putting the new discovery or invention 
into practical use. Thus the creation of Capital implies 
a present sacrifice for a future gain. 

6. Capital facilitates the Creation of more Capital. — 
If the new contrivance should prove successful, it 
would presently add to the productiveness of the labor 
of the community. Its members would have more to 
enjoy than formerly, without working any harder. They 
would therefore be in a better position to take advantage 
of any fresh invention that might occur to them. They 
could more easily spare the labor required to put it 
into practice. 

Thus, every step in advance makes every succeeding 



70 Political Economy. 

step easier. This is especially true in relation to 
mechanical inventions. The making of the first tools 
and implements ever made in the world must have 
been a very slow and painful process, — for tools are 
needed in making tools. Men must have worked 
longer and harder to make a wretched axe of stone, 
in the so-called stone-age of the world, than they now 
work to get a whole outfit of cutting tools made of 
steel. Not only so, but it must have been infinitely 
harder for them to spare time from the struggle for 
daily food, for the purpose of making tools. 

7. Civilization and Capital. — We thus see that in 
every way capital and civilization go together, and 
OTow tocjether. Increasing knowledge of nature and 
natural laws comes with the experience and observa- 
tion of successive generations. The ingenuity of men 
is always ready to suggest contrivances by which the 
new knowledge may be turned to account in producing 
wealth. 

With rare exceptions, every new contrivance de- 
mands a larger outlay of labor without immediate 
return, than was demanded by the old devices. It de- 
mands more waiting or longer waiting after the outlay 
of labor, as the price of its larger yield. Unless men 
are ready to bestow labor on these terms, the new 
idea remains a mere idea. How many happy concep- 
tions have failed to be put into use in the world's 
history, because no man was able and willing to make 
the sacrifice of present ease and comfort required for 



How Capital may he Created. , 71 

introducing it, we shall never know. But it is more 
than probable that there have been many such cases. 

The many peoples of the world, who are still living 
in poverty and barbarism, can hardly be wholly igno- 
rant, all of them, of the better ways of production de- 
veloped by the nations of Western Europe and America. 
They lack the energy and self-denial, rather than the 
knowledge, required for the creation of Capital. 

8. Two Sets of Helpers. — From all this it follows 
that two sets of men have conferred great industrial 
benefits on their fellow-men : first, the inventors and 
discoverers who have suggested new and better ways 
of production : secondly, those who, by their willing- 
ness to labor and wait for their return, or to accept 
future instead of present commodities, have furnished 
the means of putting these improvements into actual 
operation. The work of the inventor — the idea — goes 
first : the labor and waiting required for putting it 
into practice come later. Both are necessary in order 
to give us the blessing of easier and better ways of 
producing wealth. 

It may perhaps seem strange to some of my readers 
to call such things as a weir, or an axe, or the culti- 
vation of the land, an " improvement in production." 
But unless we are to believe that men were created 
with a large knowledge of productive devices, there 
must have been a time when the very simplest and 
commonest parts of our present knowledge came as a 
new discovery or invention. 



CHAPTEE IX. 

TWO CLASSES OF PRODUCERS: EMPLOYERS AND 
LABORERS. 

1. Comparatively Few Men own Capital. — Nothing 
has been said hitherto about the familiar division of 
producers into the two classes known as Employers and 
Laborers. For the sake of simplicity, I have spoken 
as if every producer supplied the capital requisite for 
carrying on his industry. We must now consider the 
highly important fact that the enormous capital used 
in production and exchange belongs, in the main, to 
a comparatively small number of persons. 

We have already seen that for the production of 
capital, labor must be spent in ways that promise no 
immediate return. Capital is the result of labor and 
waiting. Now we know that people differ very much 
in the power and willingness to wait for good things. 
To the enger and passionate, such waiting is much 
more irksome than it is to the cool and sedate. Some 
are by nature careless and improvident, ready to " let 
the future take care of itself"; others are naturally 
thrifty, anxious to increase their possessions, always 
willing to forego present enjoyment for the sake of 
future advantage. 
72 



Two Classes of Producers. 73 

The nature of production puts these qualities to the 
test. Those who are not willing to work for a distant 
object, decline to fulfil the conditions on which alone 
large returns can be obtained for their labor. They 
doom themselves in advance to a life of rude poverty, 
such as that led by our native Indians; or to a life 
of dependence on whatever other men may offer in 
exchange for labor, as is the case with so many laborers 
in all countries. 

On the other hand, those who have the foresight 
and strerjgth of will to meet fairly the whole burden 
of civilized production, who are ready not only to labor 
but to wait as long as need be for the enjoyable re- 
sults, are able to win the largest and best rewards for 
their exertions. Not only so, but they are enabled, 
by the possession of capital, to make gain by hiring 
their less provident neighbors to work for them. Once 
possessor of enough capital to employ even a small 
number of laborers, a man is usually able to gain a 
livelihood without further manual labor on his own 
part. His task becomes that of directing and controll- 
ing the labor of other men. The possessor of large 
capital is even able to relieve himself of the trouble 
of managing industry ; he can live in comfort on the 
interest of his capital by loaning it to employers. 

The familiar differences between men as regards care 
for the future are therefore of great consequence, 
socially and economically. They must be relied on 
chiefly to explain the fact that some men have capital 
while others have none. 



74 Political Economy. 



Of course men have not at the present time, perhaps 
they have never had, equal opportunities for acquiring 
capital. Some have inherited wealth, while others 
have inherited nothing. In this, as in other respects, 
the shortcomings of the fathers are visited upon the 
children. The man who has inherited even a little 
can add to it more easily than the man who has 
nothing can acquire the beginnings of capital. It is 
the first steps that are hard. 

Yet we may safely believe that, apart from mis- 
fortune, the cases are rare in our country, in which 
diligence and thrift would fail of winning some 
amount of capital. The chief obstacle is lack of will, 
the natural inclination of most men to consider the 
present ratlier than the future, and to work only in 
such ways or on such terms as promise speedy returns. 
Though well aware that, by adding the sacrifice of 
waiting to the sacrifice of labor, they might presently 
increase to an indefinite extent the rewards of their 
industry, they make no attempt to avail themselves 
of the opportunity. 

Let us be clear, once for all, that the richest man 
is under constant temptation, just as the poor man is, 
to spend his whole income in immediate enjoyment 
instead of turning it into capital. It is only by resist- 
ing this temptation that anybody, rich or poor, has 
ever acquired or maintained capital. Those who resist 
it successfully are our capitalists. 

2. Distinction between Savings and Capital. — The fact 



Savings and Capital. 75 

that the mass of laborers work for wages rather than 
for the final products of their labor, has an important 
effect on the mode by which those who desire to 
have capital may set about obtaining it. The pres- 
ence of laborers ready to work for wages makes it 
possible to acquire working capital in return for mere 
savings, — i. e. for finished commodities, or the means 
to buy finished commodities. This is therefore the 
course usually followed in practice. The person de- 
siring to possess capital saves his income, or borrows 
other men's savings, and uses the amount so obtained 
in paying wages to laborers for producing the desired 
capital. 

For this reason it is common to speak of savings as 
capital. But capital is the equipment for producing 
and exchanging commodities ; it is the necessary means 
for effective industry. Savings, on the other hand, are 
the completed results of production and exchange, — 
commodities (or the means to buy commodities) which 
the owner chooses not to consume but to spare for 
hiring laborers. When turned over to the laborers, 
these commodities are not used to assist production ; 
they are consumed by the laborers and their families 
just as they might have been consumed by the original 
owner. 

To say that savings are capital, or are a necessity 
of production, is to look on industry solely from the 
point of view of the employer; is to regard the la- 
borers not as men but as mere animals for use in 



76 Political Economy. 

production, and needing to be fed and clothed by 
other men, in order that they may be able to work 
effectively. No man can be an employer, in the 
present sense of the word, without the use of savings. 
But capital, as we have already seen, can be produced 
without the necessity of some men saving in order to 
pay other men wages. 

It is, strictly, only for the payment of wages in 
advance of production that savings are necessary. In 
order that some men may have wages, other men 
must save the means of paying them. In other words, 
if some men must have a reward for their labor 
sooner than production yields it, then other men must 
postpone the enjoyment of their reward beyond the 
point at which production yields it. One man's wages 
can only come from another man's savings. 

But there is surely no necessity or reason in the 
nature of production, why the burden of the necessary 
waiting should be borne by different persons from 
those who perform the labor. That is rather a conse- 
quence, originally, of the very unequal degrees in 
wliich men are gifted with the readiness to work for 
future advantage, — partly also, now, a natural conse- 
quence of the existing inequalities of wealth. 

As capital is, in practice, usually provided through 
the savings of the few, no serious error is likely to 
arise, except in treating wages, from confounding 
savings with working capital. It is customary to 
speak of "saving capital," and we may safely enough 



The Basis of Wage-paying. 77 

follow the general usage, understanding the phrase as a 
short expression for "saving the means to pay labor- 
ers for producing capital." 

3. Incidental Results of Wage-paying-. — It is of course 
in the nature of working for wages tliat the product of 
the labor belongs to the employer. That is the basis 
of the bargain. Yet some persons talk and write as if 
the laborer had still a reserved claim upon, or a right 
of some kind in, the product of his labor. All such 
assumptions are foolish and vain, — as foolish and vain 
as it would be to argue that the person selling a com- 
modity has a right both to the thing sold and to the 
thing he receives in exchange for it. 

Under the system known as " Profit-Sharing " there 
is a right expressly reserved to the laborers of sharing 
in any profit that may be made beyond a certain fixed 
rate. But this is not a simple case of working for 
wages. The manager, in profit-sharing, agrees to pay in 
advance a certain amount, presumably less than the cur- 
rent rate of wages^ and a further sum, greater or less, 
at the close of the year, — the precise amount to depend 
on the success of the business in the meantime. This 
arrangement does, by inference, give the laborers a re- 
served claim upon the product, — a right, for example, 
to object to any course that should lessen its value. 
But in the ordinary case of hiring for wages there is 
no such right. 

A second result of wage-paying is that the employer 
bears all the pecuniary risks of production. The la- 



78 Political Ecottomy. 



borers get tlieir wages whether the enterprise turns 
out well or ill. For the employer there is always some 
risk of losing his savings, — especially so in the pro- 
duction of things that are at all subject to sudden 
change of taste and fashion. He may find that he has 
produced the wrong article, or the wrong variety of it, 
and may find no buyers for his product except at a loss. 

There is a further risk of loss to employers by the 
overproduction of any particular commodity. A few 
producers of any article have the power to bring em- 
barrassment and loss on all producers of it by reckless 
increase of the supply. 

Under the system of producing only to fill orders, 
which is common in some branches of manufacturing, 
these risks are assumed by the capitalist, merchant, or 
dealer, who gives the order. The risk under this plan 
is probably lessened, since the dealer has better oppor- 
tunities for watching the tendencies of the market 
than the manufacturer has. But the risk can never 
be wholly done away until a plan is devised by which 
things may be produced only in response to orders from 
consumers. It is needless to say that such a plan is 
very unlikely to be devised. 

Apart from the general risks attending all produc- 
tion under division of labor, some industries have 
special risks of their own. In farming, for instance, 
there are dangers from unfavorable weather, the at- 
tacks of destructive insects, etc. In mining there is 
danger from fire, exhaustion of the deposit, etc. In the 



Advantages of the Wages System. 79 

manufacture of gunpowder there is constant danger 
of loss by explosion. These risks, so far as they affect 
property, are borne by the employer. 

4. Advantages of the Wages System. — As the em- 
ployer bears the pecuniary risks of production, and 
owns the product when completed, it is natural that 
he should have complete direction of the business. 
Wherever the laborers, even if supplied with capital, 
are too ignorant to manage the work of production, 
or to choose efficient managers to act for them, the 
control of a wise employer is undoubtedly an advan- 
tage for all concerned. It prevents waste of labor 
through short-sighted and inefficient modes of produc- 
tion. In those industries that need the joint action 
of large bodies of laborers, the managing rights of the 
employer are particularly important. Laborers have not 
always had the education and training that would 
qualify them even for choosing wise directors in such 
industries, — to say nothing of their ability to pro- 
nounce on difficult questions of general business policy. 
It may therefore be taken for granted that, so far as 
regards the mere question of management, the wages 
system has been generally favorable, in the past, to 
wise and efficient direction of all large industrial 
enterprises. 

Again, the regularity and certainty of the reward 
for labor under the wages system is a clear advantage. 
For persons whose income must, in any event, be 
small, it is important to know exactly how much 



80 Political Economy. 



they are to receive, and when they are to receive it. 
They can then arrange their scale of expenditure on 
a safe basis. Any risk of delay in receiving their 
earnings, or any uncertainty as to the amount to be 
received, is burdensome in such cases. 

Another great and obvious advantage of the wages 
system is that it provides the whole labor force of the 
country with abundant capital. The amount of capital 
available for each laborer is made as great, not as the 
laborer himself would have made it, but as those 
would have it who are most able and willing to save. 
The labor of the man who owns no capital is thus 
supplied with a full equipment of the most effective 
devices for increasing production. 

The resulting increase of product goes mainly to the 
hired laborer himself. The gains of the employer are 
easily reckoned, being the difference between his pay- 
ments and his receipts. But the laborer who has no 
capital of his own is the great gainer by the wages 
system, though his gain is less easily measured than 
his employer's, and is often quite forgotten. 

In order to tell how much the laljorers of a civil- 
ized country are benefited by the savings of other 
men, we should need to know how much they could 
produce, with little or no capital, if thrown entirely 
on their own resources. We can only be sure that, in 
comparison with even the lowest wages, the amount 
would be small. The whole excess of wages above 
what could be so produced is a clear gain to the 



Defects of the Wages System. 81 

laborers from being hired. It is a benefit accruing to 
them from the presence of capital which they have 
done nothing towards accnmulating. 

5. Some Disadvantages of the Wages System. — On 
the other hand, it must be admitted that production 
by hired labor has some serious drawbacks. On the 
side of the laborer it is unfavorable to efficiency. 
The hired laborer has no direct and personal interest 
in the product of his labor. Any immediate gain 
from improving its quality, or increasing its quantity, 
goes to the employer. The same is true of the benefit 
arising from any saving in materials or needless wear 
and tear of machinery and buildings. The hired la- 
borer lacks the personal incentive to make the best 
use of his labor and to turn everything to the best 
account. 

While, therefore, the wages system has undoubtedly 
been favorable to efficiency and far-sightedness in 
management, it depends too much on the presence 
and watchfulness of the manager. The " hireling " has 
always been proverbial for slackness in his work. 
Men, as a rule, work with a will only when the pro- 
duct of their labor is to be their own. The eye of the 
overseer cannot be everywhere ; and even if it could 
be, it is a very poor substitute for the active spur of 
self-interest, urging the worker who looks to his 
product as his reward. 

The adoption of " piece-work," or payment accord- 
ing to results, acts to some extent as a corrective of 



82 Political Economy. 



this evil. But this plan puts the workman under a 
strong temptation to do his work in a poor and hasty 
manner. Except in the few industries where defects 
of worlcmanship are readily observed, this plan is un- 
suitable. Like the system of paying by the day, it 
depends too much on the eye of the manager. The 
workman has no personal interest in the goodness and 
value of his product, nor in economizing the materials 
and machinery used in producing it. 

Since the employer owns the product he at least is 
interested in having it as great and excellent as pos- 
sible. But it is another defect of the wages system 
that even the employer's interest in production is not 
of the simple and stimulating kind that sees in the 
product a reward for the labor of producing it. For 
him the product is not a reward of labor, but a 
return for savings paid out in getting it made. His 
motive is to make profit, not to get wealth produced. 
Take away the chance to make profit, and he will 
cease to carry on production. 

Now the employer's chance to make profit depends, 
at any given time, on the price at which he can sell 
the product. A fall of the price may cut off his 
profit and thus leave him no motive for going for- 
ward. When this happens production comes to a stand- 
still, unless the laborers are willing to work for less 
money. As they commonly are not willing to do this, 
strikes and lockouts follow, — with resulting loss and 
bitterness for all concerned. These disastrous inter- 



Questions and Exercises. 83 

ruptions of industry, instead of decreasing with the 
spread of education among the masses, seem rather to 
increase in number and intensity as time goes on. No 
device has yet been disco-vered for preventing them. 
They are an evil common to all forms of wage-paying. 

It will be convenient to defer our discussion of 
wages and profits until we have considered the princi- 
ples governing the value of commodities in exchange. 

QUESTIONS AND EXERCISES. 

1. How do you show that the business of merchants is to 
manage the exchange of products ? 

2. In what sense is it true that all wealth is useful? Should 
you give the name of wealth to rum? to quack medicines? to 
dime novels? 

3. Should you give the name of wealth to a good voice? to a 
talent for acting on the stage? to great physical strength? Why? 

4. What is Natural Wealth, and how is it related to wealth 
produced by labor ? Give examples of each kind of wealth. 

5. Show that increase of knowledge tends to increase natural 
wealth. What illustrations can you give? 

6. What is meant by Production ? Can you always tell by the 
mere name of a thing whether it is a product of labor or not? 
For example : if you were asked whether a tree, or a flower, or 
a, berry, or a parrot is a product of labor, could you answer with- 
out knowing particulars? How as to books, coats, houses, and 
pictures ? 

7. In what circumstances does any kind of natural wealth 
acquire a value in exchange ? Is a nation enriched by the fact of 
its natural wealth acquiring an exchange value ? Suppose, for 
example, the lands, coal mines, etc., of the United States became 
twice as high in value as they are at present, would this of itself 
add anything to the wealth of the people? 



84 Political Economy. 



8. Is it possible for any person to grow richer by reason of the 
destruction of natural wealth ? If so, what is the precise source 
of his gain ? 

9. Did President Lincoln's proclamation of freedom for the 
slaves make any class of persons poorer than they were before ? 
If so, did it diminish tli« wealth of the United States? 

10. Why does land differ more in value in different places than 
cotton cloth does ? Do you see any reason why timber should 
differ more widely in different places tlian silk ? Any reason why 
green vegetables or fresh fish should differ more than tea or 



sugar 



11. Why have rivers and natural harbors no exchange value, 
whereas canals and artificial harbors have a value in exchange? 
Would it be true to say that streets and highways have exchange 
value, as streets and highways? How as to railways? 

12. Are mortgages and railroad bonds to be regarded as 
wealth? How as to railroad stocks? When a man buys a rail- 
road bond, or a share of railroad stock, just what does he buy? 
Suppose a railroad pays no dividends, is it wealth ? Is a bank- 
note wealth? 

13. Illustrate by example in your own neighborhood the dis- 
tinction between Capital and other wealth. 

14. What three classes of things constitute the capital of a 
community ? Give examples of each kind. 

15. A watchmaker's stock of watches are part of his capital : 
does it follow that all watches are capital ? Is there any kind of 
wealth that can never be capital? Any kind that is always 
capital. 

16. Explain the remark that "Capital is perpetually under- 
going transformations." 

17. If you were asked whether pcqjer is capital, why could you 
give no definite answer? Should you have the same difficulty if 
the question were asked in reference to coal ? Pig iron ? Race- 
horses? Printing paper? Mill machinery ? Unimproved lands ? 



Questions and Exercises. 85 

Ploiighs ? Turnip seeds ? Could you answer with certainty in 
any of these cases ? Why ? 

18. What circumstances determine the productiveness of labor ? 
Why is American labor more productive than that of most othor 
countries ? 

19. Illustrate the distinction between Productive and Non- 
productive labor. Mention some kinds of labor that are neither 
wholly productive nor wholly non-productive. To which class 
should you assign each of the following labors ; nut-gathering; 
building toy-boats; making fire-crackers; fishing for sport; exer- 
cising in a gymnasium ; playing base ball ; the study of music ; 
the study of architecture ; the study of drawing ; the labor of a 
bank-teller ; of a tailor's apprentice ; of a merchant ; of an in- 
ventor; of a doctor; of a policeman; of a jailer? Is the fact that 
labor is paid for a proof that it is productive ? 

20. In what ways may capital be created ? How do you dis- 
tinguish between Savings and Capital ? 

21. How does the possession of some capital facilitate the 
creation of more? 

22. Why are the Indian tribes of the West usually so poor ? 

23. How do you account for the fact that comparatively few 
men own capital? 

24. Mention the chief industrial consequences of the fact that 
the mass of producers work for wages. 

25. The profits made by hiring laborers can be accurately 
measured. Can the gain of the laborer be measured? How 
should you express the laborer's gain from being hired? 

26. Can wages change without any change in the amount of 
money the laborers receive? 

27. Explain the remark that " The more a nation saves, the 
more it can priDduce." Do you think of any limit to the increase 
of production through increased saving? 



CHAPTER X. 

OF VALUE IN EXCHANGE. 

1. The Distinction between Value and Price. — We 

must now consider the principles governing the value 
of commodities. The first thing to be done is to 
make sure that we see clearly what is meant by the 
value of an article, and how its value differs from the 
price of it. The price of a thing means the amount 
of money it exchanges for : the value of it means the 
amount of any and every other commodity it exchanges 
for. 

The value of a thing, therefore, includes the price 
of it. The price is simply one example or instance of 
its value ; the instance that, by frequent use, is most 
familiar and expressive to us. In speaking of value 
we compare each commodity with all other commodi- 
ties ; in speaking of price, we compare it with the one 
commodity, money. 

Money gives us a convenient and ready standard 
for expressing the value of things. For all practical 
purposes men naturally prefer to speak of price rather 
than value. Even when they use the word value, 
they often mean only the price. In political economy 
it is necessary to keep in mind the distinction, and to 



Value in Exchange. 87 

observe it very carefully. For example, the price of 
a thing may rise, without any change taking place 
in its value : the price of every other thing may rise 
at the same time. If, for example, all prices rise ten 
per cent., money is the only thing whose value is 
affected: the value of money is lowered. 

All prices may rise or fall together, but it is impos- 
sible for all values to rise or fall together. If some 
things rise in value, other things fall. If beef rises in 
value as compared with tea, tea falls in value as com- 
pared with beef. It would be impossible for a pound 
of tea to become worth more beef, and a pound of 
beef to become, at the same time, worth more tea. To 
speak of a general rise or a general fall of values is 
to use a contradiction in terms, since to say that some 
things have risen in value is the same as saying that 
other things have fallen in value. In other words, 
value is purely a matter of comparison ; there is no 
absolute standard for measuring it. We simply compare 
one commodity with another. As all the runners in a 
race cannot simultaneously gain on each other, so all 
commodities cannot simultaneously rise or fall in value. 

We shall find that the price of every commodity is 
subject to two very different kinds of change. In the 
first place, it may rise or fall without a corresponding 
rise or fall in the prices of other things. In this case 
the value of the commodity is affected. It becomes 
worth more or less of other commodities than it was 
worth before. 



88 Political Economy. 



In the second place, all prices may change together, 
and. equally ; that is to say, the exchange value of 
money may rise or fall. In this case, leaving money 
out of the account, the exchange value of other things, 
compared among themselves, remains unaltered. The 
difference between the two cases is highly important. 

Since a change in the price of an article may or 
may not imply a change in its value, it would be 
safest always to speak of value, rather than price. 
But we can hardly avoid speaking of prices. When- 
ever, in the following pages, a rise or fall of price is 
spoken of, it is to be understood as a rise or fall con- 
fined to the commodity named: implying therefore a 
corresponding change in the value of the commodity. 

2. Exchange Value and Intrinsic Value. — It is neces- 
sary also to guard against confounding the value of 
which we speak in political economy with the intrinsic 
value or usefulness of things. The value of which we 
speak here relates simply to buying and selling. The 
full name for it is value in exchange. 

It is true, of course, that nothing can have value in 
exchange unless some persons consider it a good thing 
to have. Things that have no intrinsic value for any- 
body have no exchange value either. But, beyond 
this, there is no connection between the exchange 
value of commodities and their intrinsic utility. . I 
suppose we should all agree that bread is intrinsically 
more useful than diamonds; yet one little diamond 
has more exchange value than many tons of bread. 



Value in Exchange. 89 

If the world should be overtaken by a famine, the 
exchange values of bread and diamonds would be 
changed. In either case, the value of the bread or of 
the diamond is the amount of other things to be got 
in exchange for it. 

3. Value depends immediately on Demand and Supply. — 
We are all aware that when the supply of a commod- 
ity coming forward for sale falls short of the demand 
for it, the price is usually raised. Those who have it 
for sale find that they can charge more for it than 
before, and yet dispose of their whole stock. Since 
business men are on the alert to make all they can, 
they ordinarily raise the price at once. Even if for 
any reason they fail to do this, the stock will pres- 
ently become exhausted, and the buyers, eager to get 
more, will offer a higher price for it. 

On the other hand, when the salable supply of a 
commodity exceeds the demand for it at the existing 
price, those who have it for sale find themselves 
obliged to lower the price in order to tempt people 
to buy more of it. If they fail to do this a portion 
of the supply will remain unsold on their hands, and 
they may lose more thereby than they would lose by 
lowering the price. 

Thus much we could safely say, even if all sellers 
worked in perfect harmony and strict combination 
with each other. But it is extremely rare that all 
sellers act in harmony. They are usually more or less 
in the attitude of rivals. Each acts for himself; and 



90 Political Economy. 

when it becomes clear that the commodity is not sell- 
ing as fast as it is produced, some dealer is pretty 
certain to offer his stock at a lower price than before. 
In such a case, the action of one dealer is usually 
followed by others, and finally by all. Any dealer 
who declines to follow, does so at the risk of selling 
little or none of his stock. We have in this a case of 
the competition of sellers. 

4. Ec[iiilibriiim of Supply and Demand. — The natural 
aim of trade is to make exchange keep pace with 
production, — to sell things as rapidly as they are 
produced. 

When people buy any commodity faster than it 
comes forward from the producers, the price is raised. 
The rise of price causes people to buy less of it. The 
price goes on rising until the demand is brought to a 
rough equality with the daily production. 

In the reverse case, when a commodity does not 
sell as fast as it is produced, the price is lowered in 
order to tempt people to buy more of it. The price 
goes on falling until the purchases of consumers come 
to be roughly equal to the daily production. 

Thus the value of everything tends to be such as to 
make the demand equal to the supply. But changes 
of value react on the supply of things as well as on 
the demand for them. On the side of supply we come 
to the source of commodities, namely, production. 

When the value of a commodity rises, the production 
of it becomes more profitable than before. Those who 



Value in Exchange. 91 

produce it are stimulated to produce more of it; new 
laborers are called in, more capital is devoted to the 
work, and the production is increased. 

On the other hand, when the value of a thing falls, 
those who produce it find their industry less profitable. 
This will tend to make them produce less of it. 

But the process of increasing or diminishing the pro- 
duction of most commodities is necessarily somewhat 
slow. Production, as we have already seen, requires 
time, especially where much machinery is needed, or 
long processes of growth and manufacture have to be 
waited for. Again, once men have engaged in pro- 
ducing a given commodity, it is not easy for them to 
withdraw from it. Even a temporary stoppage implies 
great inconvenience and loss both to employers and 
laborers. Men usually abandon an industry only when 
they are forced to do so. 

It follows that the rough equality between supply 
nnd demand is maintained, from day to day, rather by 
affecting the demand through changes of value than 
by affecting the supply through changes of production. 
A high or low value acts at once on the demand, 
checking or stimulating it into equality with the 
existing supply, until production can adjust itself to 
the situation. 

The connection between value and production will be 
considered more fully in the next chapter. 



CHAPTEE XI. 

COST OF PRODUCTION AS THE ULTIMATE REGULATOR 
OP VALUE. 

1. Cost of Production to the Employer, or Money Cost. — 

There are two ways of looking at cost of production. 
We may, in the first place, regard the matter wholly 
from the stand-point of employers of labor. For them 
the cost of producing a commodity is the amount they 
pay out for materials, machinery, etc., and in wages to 
their laborers. This is a natural and convenient view 
of cost of production as a matter of practical business. 
It is, in fact, the only view that could find expression in 
book-keeping. It gives the employer a basis for reckon- 
ing how much he gains by selling his product at any 
given price. The question of cost for him has refer- 
ence only to his profits. Of course, the more cheaply 
he can get the requisites of production, including pro- 
ductive labor, the greater his profits will be. 

But in several ways this view is inadequate foi 
scientific uses. First, it is too narrow, since it applies 
only to production carried on by hired labor. It gives 
us no definition for the cost of production where those 
who do the labor provide the capital too, — as is the 
case, for example, with many hunters, fishermen, 
92 



Cost of Production the Regulator of Value. 93 

tailors, shoemakers, small farmers, and others. In 
fact, it relates not to production in and of itself, but 
to the terms on which some men can hire other men 
to labor for them in producing things. It views the 
hired laborer as a productive machine whose services 
cost men something, rather than as himself a man 
equally interested with the employer in getting com- 
modities produced at a low cost. The true cost to 
men of producing the things they need must be the 
same, whether some work as hired laborers for others, 
or all work for themselves. We therefore need a 
broader definition that shall not view production solely 
as an opportunity for employers to make profit. 

Secondly, even where production is carried on by 
hired laborers, this view of cost of production exposes 
those who adopt it to very serious errors and miscon- 
ceptions. The payments an employer has to make in 
getting an article produced are liable to change for 
reasons that have no real connection with the produc- 
tion of the article. For example, four hundred years 
ago an employer's accounts showed very much smaller 
payments for wages and other things than they do at 
present. Men could be hired for from ten to fifteen 
cents a day ; wheat could be bought for eighteen cents 
a bushel ; beef for less than a cent a pound ; butter 
for a cent ; and other things in proportion.^ In those 
days money had ten or twelve times more value than 
it has now. If, therefore, we should hold the view 
1 Thorold Rogers, Work and Wages, p. 539. 



94 Political Economy. 

that the cost of production of things is measured by 
the money payments of employers, we should have to 
say that it is greater now than it was four hundred 
years ago : the fact being that inventions have very 
much lessened it. 

Those who compare the cost of producing things 
in different countries at the present time, using the 
money payments of employers as a basis of compari- 
son, are liable to the same error. The value of money 
differs very considerably in different countries and 
even in different parts of the same country. This is 
especially true in the case of countries and regions 
between which trade is impeded or prevented. For 
example, in the early days of gold-mining in Califor- 
nia, before facilities existed for trade with other parts, 
money had a much lower value than it had in the 
rest of the country. 

2. True Cost of Production. — We need a broader 
and truer definition of cost of production than the one 
just considered, a definition that shall apply to all 
production under whatever conditions carried on, and 
shall be free from liability to error on account of 
fluctuations in the value of money. 

Such a definitioii we gain by looking simply at 
production itself, rather than at the accidental and 
more or less artificial arrangements made between 
men in regard to it. It is no necessary feature of 
production that a few men should own the capital and 
should hire the rest with a view to making profit. 



Cost of Production the Regulator of Value. 95 

It is, however, necessary that men should labor; and 
it is equally necessary, owing to the nature of produc- 
tion, that most of the labor needed for producing enjoy- 
able commodities, should be expended long in advance 
of receiving them as its reward. 

These two sacrifices of our ease and present enjoy- 
ment, first the burden of labor and then the burden 
of waiting for our reward, are demanded by the very 
nature of production, and constitute for men the trua 
cost of everything they produce. Men who, having 
the requisite knowledge and natural wealth, are able 
and willing to labor and to wait for the reward, are 
in a position to produce for themselves whatever it is 
possible for men to produce. We may therefore define 
the cost of production of every commodity as the 
quantity of labor and the amount of waiting necessary 
in order to produce it. (See Appendix, page 387.) 

This definition applies equally well whether those 
who perform the labor receive wages or wait for the 
natural reward of their labor ; if they receive wages, 
then the burden of waiting is assumed by another. It 
also avoids all danger of error on account of changes 
in the value of money. 

As thus defined, cost of production is affected only 
by changes that appear in the act of production 
itself, — changes that make the production easier or 
harder than it was before. Inventions that lessen the 
necessary labor, and the discovery of new and more 
fruitful sources of materials, lessen the cost of produc- 



96 Political Economy. 



tiou. On the other hand, if the best and most con- 
venient sources of materials should become exhausted, 
the cost of production would be increased. 

But changes of wages have no effect on cost of 
production as here defined. The labor and the waiting 
required to produce any article are the same when 
wages are high as when wages are low. Changes of 
wages, as we shall see presently, affect only the profits 
of employers. 

Again, according to this definition the exertions of 
the employer himself are part of the cost of produc- 
tion, since the labor of planning and directing the 
work is a necessary part of the labor of producing 
things. The view that finds the cost of production 
in the employer's payments, makes no account of this : 
it ignores the employer's own share in production. 

Since, however, the business man's view of the cost 
of production is not likely to be abandoned, we may 
distinguish the two definitions by calling the first. Em- 
ployer's Cost or Money Cost, and the other. Economic 
Cost or Real Cost. In this way we may hope to avoid 
misunderstandings. The two, as we shall see more fully 
later, relate to very different things. 

3. Labor as an Element in the Cost of Production. — 
The chief element in the cost of production is labor. 
We include, in each case, all the labor, whether of 
hand or head, which contributes in any way to the 
production of the conmiodity. The mental labor of 
planning the work and of directing and overseeing the 



Cost of Production the Regulator of Value. 97 

workmen, is part of the cost of production as well as 
the exertions of the workmen themselves. 

It is to be remembered that the labor of producing 
an article includes all the labor from the Deginninc, 
not merely the last stage of the work. For example, 
the labor of making cotton cloth includes the labor 
spent in raising and transporting the raw cotton, as 
well as that spent in making it up into cloth at the 
mills. Also, it includes the labor of producing all the 
secondary materials needed in the production, such 
as, in the case of cotton cloth, starch, dyes, chemicals, 
fuel, etc. 

In the Industries requiring skill or training, the 
labor of acquiring this skill is also included in the 
cost of production. 

The labor of producing a commodity also includes 
the labor of making the requisite tools, machinery, and 
appliances of all kinds for carrying on the work. 

But here we must remember that the machinery, 
buildings, etc., are not used up in producing a single 
specimen of the commodity. The labor of making the 
machinery must be regarded as belonging, in part, to 
every specimen it helps to produce until it is worn 
out. Thus, if a sewing-machine stitches ten thousand 
shirts before it wears out, only one-ten- thousandth 
part of the labor of making it is chargeable to each 
shirt. In the same way, in the case of all other 
apparatus of production and exchange, only a pro- 
portional part of the labor of making it belongs to 



98 Political Economy. 



the cost of production of any given quantity of each 
commodity. 

4. How Labor is Measured. — The term " quantity of 
labor," as used in defining cost of production, needs 
some explanation. The quantity of labor required for 
producing a commodity is not measured simply by 
days or hours, though the length of time occupied 
must always be the chief factor in the case. We 
must include, with the length of time, every other 
feature of the work that tends to attract or to repel 
producers. 

A day's labor in an industry that is disagreeable, 
or dangerous, or exhausting for those engaged in it, 
is a greater quantity of labor than a day's work in a 
pleasant, safe, and easy occupation. The standard, 
however, for judging the character of different occu- 
pations in these respects, is the opinion and behavior 
of the laborers concerned, — which may or may not 
be entirely in harmony with the actual facts. What 
they think hard or dangerous or disagreeable is, for 
our present purpose, hard or dangerous or disagree- 
able ; what they think easy and pleasant is easy and 
pleasant. 

The product of an industry that the laborers are 
reluctant to enter must have a higher value than a 
product made in the same length of time in an in- 
industry which they regard as attractive, — enough 
higher to correspond with the greater sacrifice made 
by the laborers who engage in the distasteful industry. 



Cost of Production the Regulator of Value. 99 

If, for example, workmen think two days' labor in a 
coal-pit as great a sacrifice as three days' labor in the 
fields or in the forest, then so far as cost of produc- 
tion is concerned, two days' work in a coal-pit is as 
great a quantity of labor as three days' labor in the 
fields or in the woods. In such a case, other things 
being equal, the coal produced by two days' labor will 
ordinarily have the same value as the amount of 
wheat or of lumber produced by three days' labor. 

5. Of Waiting as an Element in Cost of Production. — 
I have said that labor is the chief element in the cost 
of production. But since labor does not result at once 
in a commodity good for human use, and since it is 
burdensome to wait for good things after we have 
labored to get them, this necessity of waiting must 
be included in each case as part of the cost. It is 
a sacrifice as real as the labor itself, though of a 
different kind. 

The period of necessary waiting differs much, as 
we have already seen, in different industries. For 
example, a quarter of beef and a load of building 
stones may have cost the same amount of labor; but 
their values are not for that reason the same. The 
labor that produced the building stone may have 
been for the most part quite recent; whereas, by the 
necessity of the case, the labor of raising the beef 
must have been spread over several years. The labor 
spent in the early stages of producing the beef has 
to go long without its natural reward. Therefore, the 



100 Political Economy. 



beef, when at last it is ready for use, must have 
a value enough higher than that of the stones to 
reward this longer waiting. Otherwise men would 
avoid industries, such as the raising of beef, in which 
long waiting is necessary, and would flock into those 
occupations that yield their products most quickly. 

The waiting element in cost of production is con- 
nected, as we see at once, with the capital used. 
Capital at any moment represents the labor put into 
production without receiving, as yet, any enjoyable 
return. Somebody is, of course, entitled to receive 
Nature's reward for that labor in the future. The 
man who actually performed the labor may have been 
relieved of the waiting, may have parted with his 
right to the future reward by receiving wages in- 
stead of it ; but this only transfers the burden of the 
waiting to another. Capital always implies a deferred 
reward for labor. 

A large part of capital consists of machinery. The 
natural reward of the labor spent in making machinery, 
comes by small installments, day by day, in the enjoy- 
able products the machinery helps to produce. The 
sustained waiting for these products to appear con- 
stitutes a substantial part of the cost of producing 
them. When machinery is introduced into an in- 
dustry previously carried on by hand, the cost of 
production is not lessened to the same extent as the 
quantity of labor is lessened. The making of the 
machinery involves new waiting, since the natural 



Cost of Production the Regulator of Value. 101 

reward of the labor that makes it will be very slow 
in coming. If the new mode of production should 
give us the commodity for half the old quantity of 
labor (counting in the labor of making the machinery), 
the value of the commodity would not fall to half of 
the old value. If it did, there would be nothing to 
reward the new waiting for the reward of the labor 
that makes the machinery. On these terms no man 
would devote labor to the making of machines. 

How much the value of a commodity that requires 
long waiting shall exceed the value of one made by 
the same amount of labor but with less waiting, 
depends mainly on the character of the people who 
have to be looked to for the capital needed in pro- 
duction. If these regard waiting as a great sacrifice, 
the value of things requiring long waiting will be 
high in comparison with things requiring little wait- 
ing, — the amount of labor being the same in both. 
If, on tlie other hand, they regard waiting as a slight 
sacrifice, then the waiting element in cost of produc- 
tion will count for comparatively little in determining 
value. ^ 

In other words, there is no standard for measuring 
how great a sacrifice waiting is in itself ; we can only 
take the judgment of those who submit to it. Their 
opinion regarding it is roughly indicated by the average 

1 It follows that, as a community becomes more willing to make 
the sacrifice of waiting, those products which demand longest waiting 
decline in exchange value. 



102 Political Economy. 

rate of interest on loans. In a country where the 
people readily suhmit to waiting, the rate of interest 
is usually low ; whereas in countries where waiting is 
regarded as more burdensome, the rate of interest is 
usually high. 

6. Cost of Production is made up of many small parts. — 
If now we should try to analyze the cost of produc- 
tion of any commodity, we should find it to consist 
of many small bits of labor, each followed by its 
own period of waiting. The number of persons who 
contribute, in one way or another, to the work 
of producing and exchanging even the simplest com- 
modity, is surprisingly large. The production of a 
book is probably not more complicated than that of 
most other commodities ; yet if I were to begin here 
a full account of all the separate contributions made 
by different persons to the production of this little 
book, I think the book itself would hardly contain 
the list of them. 

Let us look for a moment at tlie cost of producing 
the paper on which it is printed. 

The cost of manufacturing the best printing-paper, 
and of transporting it to the place of use, is made up 
of the items given in the following list : The figures 
are for a quantity costing $ 10,000, and are taken from 
the actual accounts of a New England paper-mill for the 
year 1887. They represent, of course, what we have 
called the Employer's, or Money, Cost, since this is all 
that the manufacturer's books are concerned with. 



Cost of Production the Regulator of Value. 103 



Buildings 1 $200 

Machinery! 516 

Fuel 360 

Wood Fibre 3,753 

Cotton Rags 1,388 

Lftien " 142 

Papers 158 

Soda Ash ....... 11 

Alum 49 



Clay. . . . 
Lime . . . 
Rosin . . . 
Oil of Vitriol 
Colors . . . 
Starch . . . 



125 

75 
6 
2 

14 



Bleach $103 

Lubricating Oil .... 21 

Lights 17 

Lumber 91 

Wrappers 64 

Marline 73 

Freight and Cartage ., . . 562 

Horse and Carriage ... 24 

Sundries . 48 

Insuraiice^ 90 

Taxes2 , 46 

Wages (including manager's 

salary) 1,974 



Total 



$ 10,000 



It may seem at first sight that only about a fifth of 
the whole money cost of manufacturing paper consists 
of wages. But a little study of the matter enables us 
to see that the sums paid for machinery, materials, etc. 
are in fact mainly payments of wages m disguise. These 
sums replace (with a profit) to other employers the 
wages paid for the production of the machinery, ma- 
terials, etc. In this respect the division of labor among 
employers makes no difference ; in the end it is as if 
one employer carried on the whole business. As the 
true cost of production is always, at bottom, made up 

1 Of course these figures represent not the total cost of the build- 
ings and machinery, but the proportion of that cost assignable to the 
given quantity of paper. (See p. 91.) The buildings and machinery 
are in fact worth many thousands of dollars. 

2 In regard to insurance as an element in cost of production, see 
the note on " Risk " at the end of this chapter. Taxes are strictly not 
a part of the cost of production ; they are rather to be regarded as a 
portion of the product taken by the government for public purposes. 



104 Political Economy. 

of labor and waiting, so the employer's cost is always 
at bottom made up of payments for labor and waiting. 

If now we should attempt to analyze the cost of 
production of any commodity into all the parts or par- 
ticles of which it is composed, the task would prove 
to be very long. Whatever is used in the production 
of the buildings or the machinery, or the wood-fibre 
or the alum or anything else named in the above list, 
is in fact used in the production of paper. Its cost of 
production is therefore part of the cost of producing 
paper. In analyzing the cost of production of paper 
we should have to analyze the cost of each of these, — 
which would give us for each of them a list of items 
about as long as that given above for the paper itself. 
Again, each article named in these new lists, would 
have a cost of production needing, in turn, to be simi- 
larly resolved into its parts ; which would give a new 
and very numerous set of items ; and so on until we 
should bring in every article that comes into play, 
directly or indirectly, in the production of paper. We 
should find, in this way, that the labor of making 
paper is resolvable into many hundreds, perhaps thou- 
sands, of parts ; some of them perhaps too small to be 
stated, but all of them necessary to the final result. 
The sum of all these labors, together with the aggregate 
of all corresponding periods of waiting for reward, con- 
stitute the true or economic cost of production. 

This reminds us of the wonderful extent to which 
civilized men have carried division of labor. The in- 



Cost of Production the Regulator of Value. 105 

dustries of a nation are closely interwoven with each 
other, forming in reality one great system of .co-opera- 
tion. Each producer depends on the help of thousands 
of others, whom he has never seen. The situation, 
along with the great advantages it brings, obviously 
imposes a grave duty on ' all concerned. Any interrup- 
tion or disturbance at any part of the system is certain 
to work injury for the whole body of producers. 

7. Market Value tends to Conform to Natural Value. — 
The Natural Value of every commodity is that which cor- 
responds to the cost of producing it. Things exchange 
for each other at their natural value when for a given 
quantity of any particular commodity, the seller can ob- 
tain as much of every other commodity as is produced 
by the same quantity, or equivalent quantities, of labor 
and waiting. Thus the law of natural value is simply 
the just rule of equal rewards for equal sacrifices. 

This is, however, a rather ideal standard to which 
the actual values of things at any given moment 
seldom or never exactly correspond. The actual or 
market value of every commodity is acted on, as we 
know, by every change of demand or of supply. These 
disturbances are temporary in their effects, but they are 
constantly occurring. The result is that the market 
value of every commodity is commonly somewhat above 
or below its natural value. 

But we can safely say that, except in special cases 
to be spoken of in a later chapter, when the market 
value of any commodity is above or below its natural 



106 Political Economy. 

value, the rule of equal rewards for equal sacrifices will 
tend to bring it back to that level. When the business 
of producing any commodity is more profitable than the 
production of other things, new labor and capital will be 
attracted into producing it, and the resulting increase 
of supply will cause the market value to fall ; when 
it is less profitable, the reverse will happen. 

We now sec how, under division of labor, each man 
knows what to produce and what to avoid producing, 
though he has never seen the persons who are to use 
his product. These changes of value are messages of a 
very effective sort from the consumers, telHng when 
too much or too little of any article is produced. With- 
out them, production by division of labor would be 
reduced to hopeless guessing. 

8. Improvements in Production. — It is important in 
considering the effect of improvements, to bear in mind 
that it is the comparative, not the absolute, cost of pro- 
duction that governs the values of things. If by a 
universal improvement we could lessen by one-half the 
cost of production of all things, the value of every com- 
modity would remain unchanged. The ratio of the cost 
of each to that of every other would be the same as 
before, and it is obviously on this alone that values 
depend, since value is simply a comparison. 

The only effect of a general and equal cheapening of 
all things would be to increase the rewaids of labor and 
waiting. Wages and profits would be higher. Things 
would be cheaper in the sense of getting more of them 



Cost of Production the Regulator of Vahte. 107 

for our work, but not in the sense of getting more of 
one commodity for another. 

Improvements do always, in practice, affect values 
when they are introduced, because no invention is uni- 
versally applicable. Coming as they do, in single in- 
dustries, they have the effect of lowering the values 
of the commodities whose production they make easier 
than it was before. It is to be observed that they 
also increase the Rewards of all producers who use the 
cheapened articles. The fall of value is obviously the 
process by which improvements in single industries 
extend their benefits to the whole community. Every 
improvement that lessens the labor of producing any 
article in general use, adds to the general prosperity. 

Since, in the long run, improvements are made to some 
extent in every industry, it follows that to some extent 
the effect of improvements in the long run, is rather to 
raise wages and profits than to lower the values or prices 
of commodities. Perhaps a better way to express it is to 
say that, in the long run, improvements raise wages and 
profits • without lowering values or prices. 

It used to be thought necessary to show in political 
economy, that labor-saving improvements are not injuri- 
ous to the laborers. There was formerly among the 
laborers of the old world a strong dislike of machinery, 
on the ground that it took the place of men, and de- 
prived laborers of the opportunity to earn wages. There 
is no doubt that, temporarily, the introduction of ma- 
chinery on a large scale may give rise to hardships 



108 Political Economy. 



until things adjust themselves to the new situation. 
But when necessary changes are made, every labor- 
saving contrivance is a benefit to the community. 
The displaced laborers soon find other employment, 
and the community as a whole has a greater return for 
its labor than it had before. I think that in America 
machinery needs no defence. 

Of Risk in Production.— It is usual to name risk as an element in 
cost of production, but it does not seeni to me that risk is an 
element distinct in kind from the necessary labor and waiting. 
Personal risks to health, etc. incurred by the producers are in- 
cluded in the quantity of labor required. [See p. 98]. Risks 
to the capital employed are no burden in themselves. The real 
burden is, in part, the labor of taking precautions against the 
danger, and in part, the labor of repairing the damage when 
loss occurs.. The burden of risk is therefore resolvable into 
labor; it simply adds to the quantity of labor necessary on the 
average for accomplishing a given result. The business of in- 
suring against loss by fire, shipwreck, etc. is simply a useful 
device for distributing the actual losses among all who incur 
the risk : a small payment by each of them is ordinarily suf- 
ficient to make good the losses, and leave a profit for those 
who conduct the insurance. 

The risk of loss to individual employers and dealers by a fall 
in the value of their goods, is strictly no pai't of the burden 
of production, since it affects only the comparative earnings of 
particular individuals, and not the general result for the whole 
community. AVhat one man loses by a fall of value other men 
gain, since they get that particular commodity more cheaply 
than they could naturally have hoped to get it. These risks 
involve a chance for gain as well as a danger of loss. 



CHAPTEE XII. 

EXCEPTIONS TO THE GENERAL LAW OP. VALUE. 

1. The Value of Natural Wealth. — The general law 
of value considered in the preceding chapter applies 
only to wealth on which labor has been bestowed, since 
that alone has a cost of production. Things that have 
come to mankind as simple gifts of the Creator acquire 
an exchange value, as we have seen in Chapter V., 
when the demand for them as a gratuity exceeds the 
supply. 

The value of natural wealth of any kind, at any 
particular place, is wholly under the control of the de- 
mand. The supply being fixed, whenever the demand, 
at any given value, exceeds that supply the value rises. 
In every place where population is increasing, this rise 
of value is usually progressive. It is the process by 
which the demand for the natural wealth of the region 
is kept down to an equality with the fixed supply. 

There are two checks on this local rise in the value 
of natural wealth. The first of these is the power of 
men to move away to other places where there is less 
crowding. The second is the continual cheapening in 
the cost of transportation, which enables men to bring 
the materials of production from regions where the 

109 



110 Political Economy. 



local demand is small to places where it is great. Of 
course iliings so transported cease to be strictly natural 
wealth and become wealth produced by labor, their value 
being regulated by the cost of bringing them. But in 
the place to which they are brought, the materials of 
production serve the same purpose as if they had been 
procured on the spot. The additional supplies obtained 
from other places keep down the value of the home 
supply. 

Such things as do not admit of transportation may 
rise indefinitely in value in the crowded portions of 
the world. As already noted, land for building pur- 
poses is the most important article of this character. 
Yet even the value of building land is greatly affected 
by the cheapening and quickening of transportation. 
In one sense the demand for building ground in the 
cities is diminished by the facility with which men, 
whose business is in the city, are enabled by the rail- 
roads to have their homes in the country. But, on the 
other hand, the railroads enable vastly greater numbers 
to congregate in the cities than could find subsistence 
there without them. The result is that cheap trans- 
portation tends powerfully, in the long run, to raise 
the value of city lands. 

2. Products that cannot be increased in Supply. — 
There are a few products of human labor which cannot 
be increased at will. Old pictures and statuary, old 
furniture, and all relics of by-gone times are of this 
nature. The value of all such articles is governed by 



Excerptions to the General Laiu of Value. Ill 

the demand. As the supply is fixed, when the demand 
for them at any given price becomes greater or less 
than this supply, the price rises or falls so as to restore 
the equality. 

Works of art even by living masters have their value 
determined in the same way. Though subject to in- 
crease, they cannot be indefinitely increased, since only 
one person in each case lias the gift of producing them. 
In practice it is nearly as if the supply of such works 
were absolutely limited. The demand for the produc- 
tions of real artists is always greatly in excess of the 
supply, except at values far above that of other things 
having the same cost of production. 

The inventor of any new article is given, by the laws 
of most countries, the exclusive right of manufacturing 
the article for a limited term of years (in the United 
States seventeen years). An article covered by a patent 
may be classed, as far as the general body of producers 
are concerned, with things that cannot be increased in 
supply at will. Yet, in practice, such articles are pro- 
duced freely in answer to the demand. The effect of the 
patent is to enable the owner of it to obtain an extra 
profit or royalty on the manufacture. In other words, it 
enables him to hold the market value somewhat above 
the natural value, — that is, if his invention should meet 
with a ready demand. 

There is a constant effort on the part of producers and 
traders to obtain, as regards ordinary commodities, a sim- 
ilar advantage by the use of trade-marks. Where trade- 



112 Political Economy. 

marks enjoy legal protection, they enable the producer of 
any commodity to keep exclusive control of the market 
for his own particular brand or " make " of the article. 
The primary effect of trade-marks may be to serve as a 
guarantee of quality for the consumer. They save the 
consumer some trouble of investigation at each purchase. 
But for this very reason they may enable the possessor 
of an established brand to obtain more for his product 
than other less-known producers are getting for the same 
quality. 

3. Products of Skilled Labor. — The value of products 
requiring special slcill or long training on the part of the 
producers, is not fully controlled by tlie cost of produc- 
tion. Such products are permanently higher in value 
than ordinary products made by the same quantity of 
labor and waiting. 

The reason is two-fold. First, the need of skill limits 
the number of persons who are able to make these 
articles : the general mass of laborers are effectually 
barred out from the business by lack of this essential 
qualification. Secondly, the demand for these products, 
if they were offered for sale at their natural prices, 
would far exceed the supply which this limited num- 
ber of laborers can produce. The high value is caused 
by this large demand acting on a restricted supply. 

But why do not more of the laborers learn the neces- 
sary skill ? The answer to this is that it is costly to 
acquire skill ; further, the outlay is for a somewhat dis- 
tant object. The same reasons which prevent the mass 



Exceptions to the General Laiv of Value. 113 

of laborers from acquiring capital, also prevent them 
from acquiring skill. Few among them are able and 
willing to save from their slender incomes the means 
whereby they themselves, or their children, may acquire 
the training necessary for the higher grades of produc- 
tive labor. The young laborers, partly no doubt from 
necessity, partly however from eagerness to earn quickly 
something of their own, turn to industries in which little 
or no preliminary training is needed. 

Thus it happens that the number of men in the skilled 
trades is never large enough to supply all the products 
of skill that would readily sell at their natural value. 
The resulting high market value is the premium con- 
stantly paid by the community to induce laborers to 
make the sacrifice necessary for obtaining skill.^ 

This is obviously a case of defective competition • 
among producers. The rule of equal rewards for equal 

1 Of course all the actual labor and waiting demanded in acquiring 
skill are included in the cost of production. The point is that the 
value of skilled products is ordinarily considerably above that of other 
things costing the same amount of labor and vs^aiting. The labor of 
the skilled occupations is, in itself, usually lighter and more agreeable 
than that of the unskilled. Yet, day for day, its products are always 
a good deal higher in value, in some cases two or three times higher. 
It is, of course, possible to maintain that the reluctance or inability of 
common laborers to strive for skill is a part of the cost of production 
in these cases ; and that the natural value here, as in the case of 
unskilled products, is a rough average of the actual market value. In 
this view the only peculiarity in the case of skilled products is the fact 
that a considerable part of the waiting necessary in producing them, 
has to be borne by a class of men who find long waiting very burden- 



114 Political Economy. 

sacrifices, which keeps market value in touch with natu- 
ral value, takes effect only where men ordinarily choose 
the industries that, all things considered, offer best re- 
turns for the sacrifices demanded. If the producers, 
especially those who are beginning life, customarily neg- 
lect their best opportunity in any direction, the full and 
direct control of natural value over market value is to 
that extent defeated. 

It is not, however, even in these cases, wholly pre- 
vented. The market value of skilled products is always 
above the natural value ; but the interval between them 
is not a matter of mere accident. It depends on the 
amount of inducement required in order to make par- 
ents and young laborers willing to face the cost of ac- 
quiring skill. At this interval, the market value is 
held in check, in the ordinary way, by the cost of pro- 
duction. Competition is obstructed ; but, with an allow- 
ance for the obstruction, it works as in other cases. 

4. Exchange between Distant Places. — A similar ob- 
stacle to freedom of competition among producers is 
found in the case of men in different countries, and 
even in distant parts of the same country. Any two 
places are distant from each other in the sense here 
intended if there are serious impediments to the free 
movement of laborers from the one to the other. 

The impediment may be difference of language, or of 
religion, or of social customs, or of climate; or it may 
be mere national prejudice, or love of home and 
friends, or the difficulties and cost of the journey. 



Exceptions to the General Law of Value. 115 

When a trade exists between two places distant 
from each other in any of these ways, the active prin- 
ciple that keeps exchange on the basis of cost of pro- 
duction is lacking. The only reason why we can say 
that market value, in any case of exchange, tends to 
conform to the cost of production, is the fact that pro- 
ducers may ordinarily be counted on to choose among 
their home industries those that offer best returns. 
The diificulty, in trade between distant places, is that 
they are largely prevented from doing this. In the 
exchange of commodities between countries, it is there- 
fore possible that the products of the one shall have 
regularly a higher value, as compared with those of 
the other, than the cost of production on either side 
would suggest. For example, the United States, in 
trading with Brazil or with China, may ordinarily ob- 
tain for the product of two days' labor here, commod- 
ities that cost five days' labor in the other country. 

Further discussion of this very interesting portion of 
our subject will be found under the head of Interna- 
tional Trade. 

5. Things having a Joint Cost of Production. — We 
have thus far spoken as if every commodity were the 
result of a separate and independent outlay of pro- 
ductive labor. In point of fact very many products 
are coupled in production with other products, so that 
the one is never produced without the other. The 
production of wheat is also the production of straw; 
the production of wool involves that of mutton; the 



116 Political Economy. 



production of beef that of hides and tallow, etc. 
Nearly every sort of production has some by-product 
or products of more or less commercial importance. 

It is to be noted that men cannot in these cases 
regulate the proportions in which the several associated 
articles shall be produced. Nature fixes the ratio for 
us. In order to increase or diminish the supply of beef 
we must also increase or diminish in the same propor- 
tion the supply of hides, horns, hair, tallow, etc. 

The natural value of the whole group of products 
resulting from, the raising of an ox is, of course, deter- 
mined by the cost of raising the animal. The relative 
value of each separate product in the group depends on 
comparative supply and demand. The stronger the de- 
mand for each product, in comparison with its quantity, 
the higher its relative value. 

Suppose that, at the existing prices of beef, hides, and 
tallow, the demand for beef increases, without increase 
of demand for the other' products. The price of beef 
will rise. This makes the raising of oxen more profitable 
than before: the production of beef will be increased. 
But this brings also an increased supply of the associated 
products ; and since there is no increase of demand for 
these, the price of them must fall in order to create 
more demand. In the end, what is gained by the rise 
in the value of beef is lost by the fall in value of the 
associated products, — the combined value of the whole 
group tending always to conforn^ to the cost of producing 
the animal from which they are made. 



Exceptions to the General Law of Value. 117 

6. Arbitrary Exceptions. — There is a further class of 
exceptions to the general law of value, arising from in- 
tentional interference with the free course of industry. 

An example, now fortunately much rarer than in 
former times, is seen in the case of things produced by 
slaves. Slave labor is not adapted for any but the crud- 
est occupations ; usually it is confined to a few industries. 
It is not open to the slaves to leave these industries when 
the products fall below their natural value ; nor is it for 
the master's interest to withdraw them. The result is, 
that the value of slave products may be permanently 
below that of other things made in the same country by 
an equal quantity of free labor. 

In some cases men who trade in several commodities 
single out one of them for exceptional treatment, — set- 
ting the price of it rather with a view to drawing custom- 
ers than to making a profit. The commodity selected for 
the purpose needs to be one in common use, as to the 
usual price of which there is general knowledge, so that 
the buyer may recognize a good bargain when one is 
offered to him. In such cases, the dealer counts on mak- 
ing up for the lack of profit on his decoy, by increasing 
his sales of other things. 

The result is sometimes, however, to establish for a 
time, a low price for the article at all the competing 
shops. It is commonly understood, for example, that 
retail grocers in most parts of the United States have 
not been making any profit by the sale of sugar for a 
number of years past. They have had to compensate 



lis Political Economy. 



themselves, of course, by charging higher prices for other 
things. 

7. Combinations, Trusts, etc. — In some cases those who 
have a commodity for sale are able to combine to keep 
up the price of it. At the time of writing these pages, 
there is much talk of " trusts " and other combinations 
for raising the prices of various articles. If a commod- 
ity be produced in a few places only, or by a few large 
establishments only, its price may be fixed by agreement 
between the producers rather than by competition. 

In order that the price may be kept much above the 
natural price, those who make the combination must be 
able to prevent other men from entering the business. 
This they can do in the long run, only by gaining control 
of most of the available sources of supply. 

A combination controlling the whole supply of a com- 
modity might extort from the consumers any price it 
chose. But even in such a case the monopolists might 
discover that it woukl not be for their own advantage to 
charge much more than the natural price. A high price 
lessens the demand for any article. There are few things 
which are absolutely necessary, and for which no tolerable 
substitute can be found. Mostly, therefore, any attempt 
to extort an unreasonable price for an article would only 
result in loss to the monopolists. They would have to 
limit their production very much in order to find a market. 
It is probable that the most advantageous price for the 
producers of all ordinary articles is, in the long run, the 
one that corresponds most nearly to the natural price. 



Combinations, Trusts, etc. 119 

Yet it is undoubtedly true that a combination among 
the producers, or even the chief producers of a commod- 
ity, may succeed for a time in raising the price of their 
product. This is especially true where large plant is 
required for the production. The mere time necessary 
for starting a competing establishment may be consider- 
able. Further, the greatness of the outlay required, and 
the risk of loss in facing a competition with the combin- 
ation, may deter outsiders for a considerable period from 
embarking in the business. To that extent the com- 
munity is always exposed to injury at the hands of a 
combination. 

Our best protection against monopolies has hitherto 
been the difficulty of forming and maintaining effective 
combinations. Where the means of production are wide- 
spread and producers are numerous, effective combina- 
tion is probably impossible. Even where the sources of 
production are limited, it has yet to be shown that effec- 
tive combination can be made permanent. No monopoly 
has in the past succeeded in maintaining itself for any 
length of time unless sustained by force of law. In a 
country where the laws allow perfect freedom of indus- 
try, I think there is no serious danger to be apprehended 
from "trusts " or other combinations to interfere with the 
natural course of production and exchange. In the end 
every such attempt is likely to bring loss rather than 
gain to those who make it. 

It must not be inferred from the space devoted to 
exceptional commodities in this chapter, that they con- 



120 Political Economy. 

stitute a very large proportion of all the things bought 
and sold, or that their value departs very widely from 
the ordinary rule. Compared with the great mass of 
exchanges subject to the ordinary rule, they are very 
small in amount : and the extent of their departure from 
the common law of value is not often i^reat. 

QUESTIONS AND EXERCISES. 

1. Explain the distinction between Value and Price. Show 
that the price of a thing may change without a change of its 
value. 

2. Remembering that every article may fall in value, show 
whether all things may fall in value together. 

3. How does a change in the value of money show itself ? Has 
money a price ? 

4. What is meant by the "equilibrium of demand and supply"? 
How is it maintained from day to day? 

5. What do you understand by the Natural Value of any com- 
modity ? What may cause it to change ? 

6. When the market value of any commodity is above its nat- 
ural value, what ground is there for anticipating a fall? Should 
you expect the fall to come equally soon in all cases ? Compare, 
for example, apples, beef, coal, and paving-stones. 

7. Are there any products whose market value is always above 
their natural value? Any always below? Why? 

8. Explain carefully the distinction between employer's Cost of 
Production, and the true or Economic Cost. 

9. Show that the employer's cost of production may change 
without any change in the true cost. 

10. How should you proceed to analyze the economic cost of 
producing a woolen coat ? What account should you make of 
the loom on which the cloth was woven ? 



Questions and Exercises. 121 

11. Explain the term "quantity of labor" as used in defining 
cost of production ? 

12. If two articles are produced by equal quantities of labor 
why can we not assume, without further knowledge about them, 
that they will ordinarily have the same exchange value ? 

13. Explain the remark that " the law of natural value is simply 
the just rule of equal rewards for equal sacrifices." How is the 
rule put in force ? 

14. If one should argue that the invention of reaping-machines 
has benefited farmers only, how should you answer him ? 

15. How is the value of building land determined ? What pro- 
ducts of labor have their value determined in the same general 
way, and why? 

16. Suppose a machine invented that gives us, for half of the 
previous labor, an article formerly made by hand; should you 
expect the value of the article to fall to half of its old value. 

17. Is there any connection between the value of products of 
skilled labor and their economic cost of production ? 

18. How is the value of wool determined? Suppose the demand 
for mutton should increase without increase of demand for wool, 
how and by what steps would the value of wool be affected ? 

19. In what cases are " trusts " likely to succeed in maintaining 
high prices ? What is necessary in order to insure permanent 
success ? 

20. Supposing it were possible for all producers to combine 
effectively, what effects should you anticipate from a universal 
system of trusts? 

21. How do you explain the fact that a diamond necklace is 
worth so much more than a barrel of flour, — seeing that bread 
is so much more necessary than jewelry ? 

22. Suppose a man loses $1,000,000 by a fall in the price of 
wheat, show whether the world is poorer by that amount. 



CHAPTER XIIL 

OF PRICES, OB THE VALUE OF MONEY. 

1. Importance of Changes in the Value of Money. — 

The value of money is expressed by the general level 
of prices. When the value of money rises the change is 
shown by a general fall of prices, and vice versa. Money 
has itself no price; a dollar is always worth a dollar, 
whether the exchange value of money be high or low ; 
but every change in the general level of prices makes 
each dollar worth more, or less, of other things than 
it was worth before. 

So far as the mere exchanging of products is con- 
cerned, it obviously makes no difference to the exchan- 
gers whether the prices be all high or all low. If, for 
example, a man has a hundred bushels of wheat to 
exchange for cotton cloth, it makes no difference to him 
whether the wheat be a dollar a bushel and the cloth 
ten cents a yard ; or the wheat five dollars a bushel 
and the cloth fifty cents a yard. It is only compara- 
tive prices that tell in simple exchange. If the price 
of wheat should change, the price of cloth remaining 
stationary, that would affect the values of the two 

articles. 

122 



The Value of Money. 123 

But though the general level of prices is immaterial 
in simple exchange, it is highly important in some 
other ways. Much of the business of the world involves 
agreements to pay money in the future. All loans, 
especially loans for long periods, such as are represented 
by city, state, and national bonds, are of this character; 
also all contracts for the future delivery of goods at set 
prices. If the value of money change in the meantime, 
evidently the basis of the agreement is disturbed to the 
disadvantage of one of the parties to it. 

Again, the wages of laborers (including salaries of all 
grades) are agreed upon in money. Every general rise 
or fall of prices lowers or raises the real wages of all 
persons who work for hire. Of course the wage agree- 
ments may be revised; but they are never revised at 
once, and for mere temporary fluctuations of prices they 
could hardly be revised at all. 

2. Market Value and Natural Value of Money. — True 
money is always a product of labor. Every nation has 
the power to choose the product of which its money 
shall consist. In past times there was a good deal of 
diversity in the money of different peoples; some used 
cattle, some iron, some bronze, and some silver; others 
used shells, others salt, and still others, tea. In modern 
times all civilized nations agree in using gold and silver. 
The essential qualities of true money are that it shall 
have a value of its own, that it shall be convenient, and 
that it shall be as little as possible exposed to fluctuations 
of value. 



124 Political Economy. 

True money being a product of labor, it has, like all 
other products, a natural or normal value depending on 
the cost of producing it. Also it has, like all other 
products, a market value depending immediately on 
supply and demand, but tending in the long run to con- 
form to the natural value. There are, however, some 
notable peculiarities in the case of money which call 
for a special discussion of its law of value.- In the 
present chapter we shall confine our attention to its 
market value alone. 

3. Meaning of the Supply of Money. — The supply of 
money, like the supply of every other article, is the 
amount of it offering in excliange for other things. 
But the supply of every other article is kept down by 
the constant drain made upon it by the purchases of 
consumers. The amount of it in the market at any 
time consists mainly of newly-made specimens. In the 
case of money there is little or no buying for con- 
sumption. We buy it {i.e. give other things in exchange 
for it), not intending to keep it, but to pay it away again 
for other things. The supply of money consists, there- 
fore, mostly of old pieces. The same old money is paid 
again and again for goods, until it becomes so worn as 
to need recoining. 

Now every time a piece of money is used in making 
an exchange, it counts in the supply of money quite as 
effectually as if it were a new piece. It follows that 
in ordei" to ascertain the supply of money in a country, 
we should have to do something more than merely to 



Tlie Demand for Money. 125 

count the number of dollars or pounds in its currency ; 
we should have to take into account the number of 
times each dollar is used in exchange in a given period. 
This is called the Eapidity of Circulation of money. 

The rapidity with which money circulates in a 
country depends partly on the business arrangements 
and partly on the temperament of its people. We 
shall have occasion to discuss the subject fully a little 
farther on. 

4. Peculiar Character of the Demand for Money. — 
The demand for money is also marked by two notable 
peculiarities. The first of these is its remarkable steadi- 
ness. Money being the medium for making exchanges, 
the demand for it is as great as the demand for all other 
things put together; the demand for every other thing 
presents itself first in the form of a demand for the 
money wherewith to buy it. 

Putting the same fact in another way, the demand 
for money consists of all the things offering for sale, or 
needing to be sold. Evidently, therefore, it depends on 
the total production of things, and this, as we easily see, 
must be slow to change. It follows that the demand 
for money has greater steadiness than the demand for 
any other thing. Changes of fashion, so powerful in 
other cases, have no effect on the demand for money, 
since they imply no change in the total product of 
the world's industry. 

Again, merely anticipated changes of supply, owing 
to changes in the conditions of production, can have 



126 Political Kconomij. 

but little, influence on the demand for money. If the 
wheat crop threatens to be deficient, the demand for 
wheat increases and the value rises at once. If a new 
copper mine is discovered, the demand for copper falls 
off at once : intending buyers will not buy much at 
the old value, and holders of it must lower the price 
before a single pound of the new copper is in the 
market. 

But the demand for money does not fluctuate for 
such causes; it can be changed only by changing the 
total quantity of things for sale. To give up demanding 
money would be to give up trying to sell goods. Fur- 
ther, it would be impossible to get more money for goods 
this year because the supply of money is likely to be 
greater next year. Prices are as high already as the 
existing supply of money will allow them to be, on con- 
dition of selling things as rapidly as they are produced. 

The second peculiarity of the demand for money is 
that, beings in fact a demand for other things, it is 
satisfied with any substitute or representative of actual 
money which will answer equally well the real end in 
view. Now we shall see presently that men have in- 
vented some excellent substitutes for money, — together, 
unfortunately, with some very bad ones. A very small 
proportion of the payments made for goods in this 
country are now made with coin. We find mere paper 
evidences of the riglit to get gold and silver on de- 
mand a more convenient sort of currency for ordinary 
purposes than actual gold and silver coins. 



Hov) Prices are Fixed. 127 

The result is that the offer of goods for sale has 
now become a nominal rather than a real demand for 
true money. It is in practice a demand for the mere 
right to get true money in case of need, but with a 
practical certainty, in most cases, that the seller will find 
the mere right itself entirely sulificient for his purpose. 
In fact, then, the real demand for money is limited to 
such a sum as may enable the banks and the Treasury 
to pay coin to every holder of the right to get coin, who 
chooses to exercise his right. 

I shall not wait in this chapter to discuss the various 
substitutes for money, and the peculiar effects of each. 
Our present task is to consider the operation of supply 
and demand in determining the market value of money, 
or the general level of prices at any given time. For 
the moment we shall regard as money everything that 
the people accept as money. Since true money and 
all the honest substitutes for it rise and fall in value 
together, we run no risk of falling into error by tempo- 
rarily treating the whole currency, whatever its amount 
and composition, as if it consisted wholly of true 
money. 

5. How the General Level of Prices is Fixed. — The 
problem of the value of money, or the general level of 
prices, is one of considerable difficulty. In order to. 
master it, the student must consider carefully every 
point in the case. ., 

In the first place, it is to be remembered that things 
must be sold as fast, on the whole, as they are produced ; 



128 Political Economy. 



otherwise the markets become glutted. The efforts of 
the producers and dealers are directed towards ol:)tain- 
ing for all articles the highest prices at which the 
whole product will sell. The producers are especially 
interested in having the price as high as possible. The 
dealers, however, must take care that the goods on 
hand shall move off as rapidly as new goods come for- 
ward from the producers. If they find products accumu- 
lating on their hands they must, in self-protection, set 
the prices lower, both when they buy and when they 
sell. 

Now, in order that exchange may keep j)ace with 
production, it is necessary that the amount of money 
demanded for the whole product of industry shall be 
roughly equal to the whole supply of money offering 
for goods. In other words, if you add together the 
prices of all the goods needing to be sold each week, 
the sum of them must be roughly equal to the amount 
of money the buyers are able and willing to spend in 
the purchase of goods each week. 

If, for example, the aggregate of the prices asked 
for the week's product be one hundred and two mill- 
ions, and the people have only one hundred millions 
to spend in buying, it is clear that about two per cent, 
of the goods must remain unsold. In this situation 
prices must fall ; that is to say, the value of money 
must rise. 

If, on the other hand, • the prices asked be ninety- 
eight millions, the supply of money being a hundred 



Ho%o Prices are Fixed. 129 

millions, the stocks on the hands of the dealers will 
get sold faster than new goods can be found to replace 
them. In this case the prices must rise; that is to 
say, the value of money must fall. 

Since, however, buying and selling are only the 
separated halves of the general exchange of products, 
the prices paid are on the whole identical with the 
prices received. It may seem therefore that the buyers 
may pay as much as they receive, and that there is 
really no limit to the prices that might be charged and 
paid. 

This would be true if product were exchanged directly 
for product, using the price of each simply as a means 
of comparison. But where money of any kind has to be 
used, there is at once a question of the sufficiency of 
the supply of it to carry on the exchanges at a given 
scale of prices. No part of the money can be in two 
places at once. Everywhere that a payment is being 
made, there must be money enough to make it ; and 
the same money cannot be used in making another 
exchange until the receiver, or somebody else receiving 
it from or through him, uses it again in buying goods. 

This brings us back to the two things which deter- 
mine the supply of money ; the quantity of it in cir- 
culation and the rapidity of its circulation. The quan- 
tity being a simple question of the number of dollars 
in use, it is not likely to perplex the student. We 
shall consider in the next chapter the circumstances on 
which the quantity of money depends. The circum- 



130 Political Economy. 

stances determining its rapidity of circulation are equally 
influential in fixing the general scale of prices, and are 
at the same time much less simple. We must there- 
fore try to gain some clear ideas regarding them. 

6. The Movements of Money. — The movements of 
money in detail are exceedingly intricate, but there 
are certain great currents of circulation which are cre- 
ated and determined by the business arrangements of 
each country. These are not hard to follow, and they 
are sufficient at least to explain the meaning of "rap- 
idity of circulation " in its bearing on prices. In 
studying them the following hints may be helpful. 

(ft) It is most convenient here to confine our atten- 
tion to prices at retail. Though these are not uniform, 
not being fvilly under the control of competition, never- 
theless it is at retail that the true exchange of products 
is effected. The transfers of goods from the producers 
to wholesale merchants, and from these to the retail 
merchants, look towards the final sale to consumers and 
are designed to facilitate this. For our present purpose, 
prices at wholesale may be regarded as conforming to 
prices at retail, with an interval sufficient to give the 
retail merchant the ordinary rate of profit. The same 
principle runs back through the earlier prices in the 
series, till we reach the original payments for productive 
labor. The whole chain of prices and payments may be 
regarded as conforming to the level of prices at retail, 
with necessary intervals. 

{b) When money has once been used in the purchase 



The Movements of Money. 131 

of goods for the buyer's consumption, it cannot be simi- 
larly used again until, in the course of business, somebody 
again receives it in payment for labor or waiting, and 
chooses to spend it in that way. If the receiver should 
choose to save it for paying wages to productive laborers, 
or to spend it in paying for non-productive services of 
any kind, the circulating period is likely to be longer 
than if he should buy goods with it himself. Again, 
if the receiver of the wages should in turn save it for 
use in hiring another man, instead of buying goods 
with it for himself, the circulating period is likely to 
be still further lengthened. 

(c) After each use of money in buying goods for the 
buyer's own consumption, the business arrangements of 
the country may require it to make a considerable cir- 
cuit before it can reach the person who is next to use 
it in similar buying. The money that pays for goods at 
retail must find its way back through all the channels 
by which the goods, and the materials for making them, 
come forward in the course of production and exchange. 
Some of it must go to each person whose labor or wait- 
ing aids in producing goods or in conveying them to the 
consumer. The number of hands through which it must 
pass in reaching the next man to spend it, and the delay 
at each stage of its passage, determine the length of time 
that must elapse between each use of money in paying 
for goods at retail, and the next similar use.^ 

1 It may be well to state that these principles relate, not to par- 
ticular pieces, but to sums of money. Each dollar being the precise 



132 Political Economy. 



{(I) It is evident at once that the circulating period is 
not the same for all parts of the currency. The sellers 
at retail spend a part of the money they receive in buy- 
ing things for their own use and that of their families. 
The money so used returns quickly to become again part 
of the supply acting on prices : it makes the shortest 
circuit that is possible. Very different is the circuit 
made by money which is used by the retail merchant 
in buying goods at wholesale, and then by the wholesale 
merchant in buying goods of the manufacturers, and then 
by the manufacturers in buying materials, and then by 
the producers of materials in paying wages to their labor- 
ers. It is clear that a sum of money always taking the 
short circuit could do much more buying at retail than 
an equal sum that should always take the long one. 

(c) To all except the last receiver (the one who 
spends it) the money may represent savings to be used 
in business with a view to profit. This usually requires 
some consideration and planning. Even if this were not 
so, every business man needs to keep some money by 
him to meet unforeseen calls. Each must therefore hold 
the money he receives long enough to keep his reserve 
of cash up to the required limit. In fact, at any given 
moment, the money of the world is mainly held by 

equivalent of every other, the individual pieces of money may ex- 
change places freely without affecting the result. In fact, the very 
form of currency used in retail transactions differs from that chiefly 
used in wholesale trade. In the former, notes and coins are used for 
the most part, whereas the larger transactions of wholesale trade are 
settled by the use of bank deposits. 



Two Functions of Money. 133 

business men, either as savings awaiting investment (or 
re-investment) or as reserve funds to meet emergencies. 

Even those persons who ordinarily spend their whole 
income do not part with all the money they receive the 
very day they receive it. They must ordinarily reserve 
some part for current payments, until they can count on 
receiving more. 

(/) It is to be noted that money has two distinct 
functions to perform in its circuit, the one as a medium 
of exchange, the other as a vehicle for transmitting un- 
invested savings and for paying wages. It is highly 
important to keep the distinction in mind. 

The consumer who pays money for goods, uses it simply 
as a medium of exchange. The dealer, in his turn, uses 
in the same way whatever part of it he spends. For 
him, however, the sale of the goods is the close of an 
investment. The money represents savings, now in the 
free or uninvested state. Much the greater part of it 
he must use over again in his business. If he pay it as 
wages, his act is clearly not one of exchange. If he use 
it to buy new goods at wholesale, this again is a case of 
investment rather than of economic exchange. He gives 
free savings in return for invested capital. The same 
is true when the wholesale merchant buys goods of the 
manufacturer. By these transfers the savings released 
from investment by the consumer's purchases at retail, 
are transmitted to the producing employers, by whom they 
are embarked in new investments through payment as 
wages. In the hands of the laborers the money received 
as wages becomes again a mere medium of exchange. 



134 



Political Economy. 



7. Diagram illustrating the Circuits made by Money 
in the ordinary course of production and exchange. 



^ 



I e ''r"'*^% ,.^:^f. ---------- r^- "^^3 



t 



1 1 1 1 I iir I I I I I ^ X A i\ 
II M 1 p I 1 I I 1 , a v\ Iv/ J, 




!3 



1 I '— ~I^ 



^ 



Explanations. — At 1 the money is pair! for consumable com- 
modities at retail; at 2 it is paid to the wholesale dealers; at 3 
to the producers of finished commodities; at 4 to the producers of 
materials; and at 5 to the producers of machinery.. The dealers 
and employers spend the portions of a, r/, <;, y, and q, in buying 
commodities at retail, and pay as wages the portions h, e, h, I, 
and 0. (The latter include salaries, fees, and payments for non- 
productive services as well as savings paid to productive laborers. 
Money paid as wages passes through a bulb.) The recipients of 
the wages spend the portions c,f, i, m, and r, in buying commodi- 
ties at retail, and save or pay as wages in other ways the portions 
ly, e\ //', /', and o'. The producers of materials pay the portion n 



Circuits Made hy Money. 135 

for machinery ; and the producers of machinery the portion p for 
materials. 

Everything is a finished commodity in the sense here intended 
when it has reached the condition in which it is to be used and 
enjoyed as a reward of labor or waiting. For example, coal for 
house use is a finished commodity, even though coal for use in a 
factory is only a material. The arrows outside of the figure are 
intended to indicate the return movement of products of labor, for 
which the money is jaaid, — thus the one at the top indicates the 
movement of materials and machinery to the producers of finished 
commodities; the one at the right the movement of finished com- 
modities from the producers to the wholesale dealers, etc. 

The diagram makes no pretence of giving a complete picture 
of industry, or of including all the movements of money. For 
example, speculative trading in stocks, bonds, land, etc., makes a 
considerable demand on the currency ; but it may be regarded 
rather as keeping a certain amount of money out of use in pro- 
duction and exchange than as constituting a part of the true 
circulation. Again, no attempt is made to separate payments for 
transporting goods and materials from other payments ; though 
they do not exactly coincide in point of time with any other set 
of payments, we may perhaps regard them as included in the dis- 
bursements at wholesale. Again, no account is made of the les- 
sening of industrial incomes by taxes. These undoubtedly lessen 
somewhat the rapidity of circulation of the money drawn into 
public treasuries ; but unless taxes be excessive, or the proceeds 
be held unduly long, the proportion of the general circulation 
absorbed by them is small, and may be ignored. 

It is assumed in the diagram that all commodities pass through 
the hands of one, and only one, wholesale merchant. In fact, of 
course, many products are sold directly to the retailer by the pro- 
ducer, while others pass through the hands of several wholesale 
dealers. Perhaps the two errors may be regarded as offsetting 
each other, so far as the rapidity of circulation of money is con- 
cerned. 



136 



Political Economy. 



8. Application of the Foregoing Principles. — Let us 

now suppose the currency of a country to consist of 
$150,000,000, distributed among the circuits of our dia- 
gram as indicated in the following table. Assuming for 
simplicity that each receiver of money holds it for a 
week, we group together circuits of the same length. 



Returning at 


Amount 
circulating. 


Circulating 
period. 


Corresponding supply of 
money for purchases 
at retail each week. 


</. 

c and d . . . 

b',f, andg . . 
c', i, j, and q . 
h', VI, and r . . 
I' and o' . . . 
n and p . . . 


$10,000,000 
24,000,000 
27,000,000 
40,000,000 
25,000,000 
18,000,000 
6,000,000 


1 week. 

2 weeks. 
3 

4 
5 
6 
5, G, 7 " 


$10,000,000 

12,000,000 

9,000,000 

10,000,000 

5,000,000 

3,000,000 

(say) 1,000,0001 




$150,000,000 




$50,000,000 



The weekly output of consumable commodities offered 
at retail in the country must, under these conditions, bear 
an aggregate price of about $50,000,000. This will deter- 
mine the general leyel of prices in the country. The rela- 
tive cost of production of each commodity will, of course, 
determine the relative price of each, i. e., its value. 

If the amount of money in circulation should be in- 
creased to $200,000,000, distributed in the same way, 
the aggregate price of each week's product would be 
^ Divided between j, I, o, and q. 



The Cause of " Dull Times." 137 

raised from $50,000,000 to $67,000,000. If each re- 
ceiver of money should come to hold it, on an average, 
one day longer, the aggregate price would have to fall 
from $50,000,000 to about $42,000,000. 

If, the supply of money remaining unchanged, the 
aggregate production of commodities should be increased 
say ten per cent., the price of each article would have 
to be lowered roughly ten per cent, in order to sell the 
whole product. 

The money transactions of a commercial country are of 
course much less simple and uniform than our diagram 
and this hypothetical case may seem to imply. But 
whatever their complexity, they are governed by the 
same general principles as the simple case ; the supply 
of money offering for goods has the same dependence on 
the quantity of money in circulation, and the rapidity of 
circulation of the different portions. 

A study of our diagram may also help to make clear 
the two functions of money (p. 133), and the resulting 
connection between the payment of wages and the ex- 
change of commodities. If anything occurs to check 
the payment of wages at h, e, h, I, or o, it is easy to see 
that the supply of money offering for goods at 1 must 
fall off in consequence. In fact, the lessened sales to 
laborers constitute the real lessening of wages in such 
a case. The situation is that known under the name 
of " dull times," or a depression of business. 

9. Deficiency of Money looks like an Excess of Goods. — 
The popular explanation of a business depression is usually 



138 Political Economy. 

that too many commodities are produced. The appear- 
ance of the markets certainly favors this view. There is 
an apparent surplus of every commodity ; a real surplus, 
if one can be imagined, could hardly look differently. 

But those who regard this as a case of general over- 
production are misled by mere appearances. They forget 
the masses of people who, in times of business depres- 
sion, suffer for want of these very things that seem to be 
in excessive supply, and would gladly give their labor in 
return for them. 

The real trouble, at such a time, lies in the hesitation 
of business men as to the investment of their savings. 
The money and substitutes for money that are ordinarily 
paid for labor as rapidly as new money is received, are 
partly allowed to lie unused in the banks. The result is 
that those who live by wages are unable to buy as freely 
as usual. The circulation of money is checked. 

Just why business men are more perplexed and slower 
to invest at some times than at other times is a question 
we cannot now attempt to answer, — it is in fact a most 
difficult question. Usually these periods of depression 
follow periods of strong confidence and prompt invest- 
ment. The change from brisk times to dull times usually 
begins with the failure of some ill-judged ventures of a 
speculative character, carried on by means of borrowing 
and other forms of credit. The losses caused by these 
failures often involve sound business houses in disaster. 
In consequence of them trade becomes embarrassed, and 
wide-spread distrust takes the place of over-confidence. 



Excess of Money looks like a Deficiency of Goods. 139 

The real trouble, in the period of depression which fol- 
lows, is not a general excess of commodities but excessive 
caution in the hiring of laborers. Business men do not 
invest their savings in new enterprises with accustomed 
promptness and energy ; the result is that many laborers 
are unemployed, and others work only half-time. The 
aggregate money income of those who live by wages 
being reduced, a corresponding reduction takes place in 
their usual purchases of commodities. Goods lie unsold 
on the hands of the dealers. There are not too many 
commodities, but there are too many commodities unsold. 
There is a deficiency of purchasing power on the part of 
the usual buyers. 

The true remedy would be, not to lessen the world's 
supply of good things (of which we always have too 
few), but to restore the purchasing power of the wage- 
earners. This could be done either by restoring to the 
old amount the payments of money to laborers ; or by 
reducing the prices of commodities in the same ratio 
as the money income of the laboring class has been 
diminished. 

But the first remedy is out of the question until the 
congestion of the market shows signs of lessening ; and 
the second is naturally resisted by holders of goods, since 
it seems to involve a loss of their profits. A business 
depression is therefore an awkward dilemma. It lasts 
usually until, partly by fall of prices and partly by re- 
stricted production, the aggregate prices of the goods for 
sale come to match the money in circulation. 



140 Political Economy, 



10. Excess of Money looks like a Deficiency of Goods. — 

When for any reason the supply of money exceeds the 
demand for it, we have the opposite effect to that just 
considered. The readiness of most persons to buy is 
limited only by their means of purchase. In the case 
we are now considering the money income of the mass 
of men has been increased. Their purchasing power 
exceeds, at previous prices, the forthcoming supply of 
commodities. The stocks of commodities for sale be- 
come daily lessened, because people buy faster than new 
goods are produced. There is apparently a deficient pro- 
duction of all things. 

This situation lasts but little time in comparison with 
that in which money is deficient. Men are slow and 
reluctant to lower their prices, but they are very prompt 
to raise them when opportunity offers. When the sup- 
ply of money is increased its value soon falls. This case 
attracts little attention because it is of brief duration. It 
regularly appears after a depression of business, when the 
money and substitutes for money that have been held 
back during the " dull times " are once more put into 
active circulation by being used in hiring laborers, or in 
purchasing products of labor from those engaged in pro- 
duction. It also appears whenever new discoveries of 
gold add to the local supply of money, and when addi- 
tions are made to the bank currency of any country. 



CHAPTER XIV. 

PRODUCTION OF THE PRECIOUS METALS. 

1. Dependence of Prices on Quantity of Currency. — All 

that now remains to be done in order to complete our 
study of prices, or the value of money, is to consider 
how the quantity of money in circulation is determined. 
The goods needing to be sold constitute the demand for 
money. The supply depends on the quantity circulating, 
and the rapidity of its circulation. We have seen that 
the business arrangements and habits of each country 
determine the rapidity of circulation of its money. Our 
remaining question, then, is, What determines the quan- 
tity of money ? 

The question of quantity brings us at once to the 
source of money. The gold and silver of which all our 
true money consists, are products of human labor. The 
quantity of them produced must therefore depend in the 
long run on the principles laid down in Chapter XL ; 
that is to say, men can be counted on to produce as 
much of them as there is a demand for at the natural 
value. 

But here we are met by a familiar fact which makes 
the application of ordinary principles much less obvious 
in the case of money than in any other case. The de- 

141 



142 Political Economy. 



maiid for money being at bottom a demand for other 
things, it is satisfied with any representative of true 
money that will answer the real object in view. We all 
know that, in point of fact, people in this country use 
hardly any gold coin in ordinary business, and not much 
silver beyond the amount necessary for small change. 
We use instead mere promises to pay coin, and rights to 
demand coin, supplied to us by the banks and by the 
Treasury of the United States.^ 

So far then as our prices depend on the quantity of 
money in circulation, they depend on the quantity of this 
Bank Currency, as we may conveniently call it. This 
exceeds very much the total quantity of coin in the 
country. Yet each dollar of it purports to represent a 
dollar of true money ; it gives the holder an unques- 
tioned right to get a dollar of coin if he wishes it ; so 
that its quantity must stand in some definite relation 
to the quantity of coin. 

2. Nominal and Real Demand and Supply of Money. — 
The fact is that, in the case of money, there is a nominal 
demand far exceeding the real demand, and a nominal 
supply far exceeding the real supply. The nominal de- 
mand consists of all the goods needing to be sold ; the 
real demand is limited to the amount requisite for main- 
taining confidence in the bank currency with which in 
practice exchange of products is mainly carried on. On 
the side of supply, the nominal stock of coin is as great 

1 For the present purpose we may regard the Treasury as simply a 
great bank issuing promises to pay coin on demand. 



Value of Precious Metals not Due to Coinage. 143 

as the whole mass of coin and rights to call for coin 
which constitute the active currency ; the real stock is 
the far smaller amount held as reserves for redeeming the 
bank currency, plus the coin in actual circulation. 

The question of prices, then, so far as it is a question 
of the quantity of money, has two distinct branches : 
first. What determines the actual stock of coin ? and sec- 
ondly, What settles the proportion between bank cur- 
rency or the nominal stock of coin and the real stock ? 
The first of these questions relates to the production of 
the money-metals. The second involves some elementary 
principles of banking. Both must be studied in order to 
understand how the value of money is governed. 

3. The Value of the Precious Metals not due to Coin- 
ing. — It is necessary to observe at the outset, that gold 
and silver have other uses besides serving as money. 
They have long been highly prized by all nations as 
material for jewelry and other ornaments, plate, watch- 
cases, etc. In fact, it was the high value attached to 
them for these purposes that made them specially suit- 
able for use as money. No substance could be generally 
used as money if it were not generally regarded as use- 
ful or desirable in itself. In payments between men of 
different nations it would not be accepted. Further, 
even for use in any one country, it would be defective as 
money, because it would lack one of the most important 
influences in steadying the value of gold and silver; any 
decline of their value calls out an increase of demand for 
them in the arts, thus checking the fall. 



144 Political Economy. 

Gold and silver were used as money before mints and 
coining were introduced, and before there were any laws 
on the subject of money. It is still one of their chief 
recommendations that their value as coin is independ- 
ent of the mint-mark they bear. The mere coining adds 
nothing to their value. The coins may be defaced or even 
melted back into bullion without loss of value. In fact, 
coins are constantly melted down for use in the arts, just 
as if they were mere bullion.^ 

In old times gold and silver passed by weight. The 
name of the English " pound " sterling, although it has 
now become a mere name, is a standing reminder of the 
way in which our early ancestors used silver as money. 
One is apt to forget that the money-metal of our own 
day still passes by weight, though we seem only to count 
it as dollars. The weighing is done once for all at the 
mints. The name and otlier marks stamped on each 
piece are merely ready proof that it contains a certain 
quantity of metal. This is the advantage of coining, that 
it saves us all trouble as to weighing, and gives us the 
gold and silver in pieces of uniform size, thus avoiding 
troublesome fractions in the reckoning. 

The coinage laws of each country fix the weights and 
names of its coins. As to the exchange value of the 
eagle, or the sovereign, or the franc, after it is coined, 

1 These statements assume unrestricted coinage. Of course, no 
silversmith would think of using our present silver coins as mere 
silver ; he can buy the silver contained in a dollar piece for about 
fifty-one to fifty-five cents. They are all mere "tokens," and the 
coinage of them is strictly limited. See Chapter XVI. 



Prodiiction of Gold and Silver. 145 

that is a matter over which the coinage laws can have 
no control, since it depends on the prices of goods, and 
these no statute attempts to regulate. 

4. The Production of Gold and Silver, — The production 
of the precious metals seems to be in some respects differ- 
ent from ordinary industries. The labor required in the 
production of all minerals is largely that of mere search 
for the natural deposits of them. This seems to be spe- 
cially true of gold and silver. They are seldom found in 
very extensive deposits, as, for example, coal and iron are 
found. They are found rather in scattered washings, 
veins and " pockets," often of great richness, but usually 
of limited extent. The search for these is always more 
or less of a lottery, and as a result the output at any one 
source is more variable than in other mining industries. 
Where so much depends on" luck and on chance discov- 
ery, it may seem unreasonable to speak of any connection 
between the value of the precious metals and their cost of 
production. Yet there is undoubtedly a connection. It is 
the high value of gold and silver that impels men to search 
for them. Every fall of their value abates something of 
the zeal in discovery ; every rise increases it. 

Again, although the result of one man's labor for a day 
or a week is very uncertain, the average product of the 
labor of many men is less so. Much depends on chance 
"finds" from day to day, but, apart from great dis- 
coveries, these average themselves in the general result 
for periods of considerable length.^ 

1 From 1850 to 1890, notwithstanding local variations, the total 
yearly product of gold for the whole world was remarkably steady, 



146 Political Economy. 



Men go into the production of gold and silver as tliey 
go into fishing and other uncertain pursuits, because they 
tliink that, taking good and bad luck together, men do as 
well in that as in other things. Even allowing much for 
the spirit of gambling, which undoubtedly plays an active 
part, there is enough of business principle in the produc- 
tion of gold and silver to keep their value roughly under 
the control of ordinary rules. When the profits of gold 
and silver mining are on the whole high, men will be 
attracted into the industry ; when they are low, men will 
seek other industries in preference.^ 

There are two sets of changes occurring from time to 
time in the cost of producing gold and silver, and there- 
fore changing the quantity of them produced. The first 
of these relates to the sources of the metals. The dis- 
covery of new and more productive mines may greatly 
increase the yield for a given amount of labor. When 

being about five million oimces. It has increased since 1890 to about 
eight million ounces a year ; this is about fifteen times the yearly- 
product jirior to 1850. The production of silver is much less steady, 
and is estimated to be about twenty times as great as that of gold. 
Much of the silver is obtained as a by-product in the mining of lead, 
copper, and some other metals. 

- It is necessary to bear in mind the precise way in which a general 
rise or a general fall of prices changes the earnings of the gold-miners. 
The money-metal of a country has itself no real price. If coinage 
be unrestricted, an ounce of tlie metal will always sell for the amount 
of coin it will make. But when the product of the mines is coined, 
it is obvious that the quantity of ordinary commodities the miners 
can get for their labor will depend on the general level of prices. 
A rise of prices, therefore, makes it harder to get commodities by 
digging gold. 



Stock of Precious Metals slow to Change. 147 

discoveries of this kind are made on a great scale, as 
happened in the case of gold in 1848 and 1849, and in 
the case of silver in 1875, the annual output is enor- 
mously increased. On the other hand, the exhaustion of 
a part of the known sources may diminish to an indefinite 
extent the current production. 

The other set of changes is connected with the mode 
of extracting the metals from the foreign substances with 
which, in their native beds, they are mixed or chemically 
combined. The process of extraction was formerly labori- 
ous, and therefore costly. It has now been much cheap- 
ened, and may be further cheapened by new inventions. 
The immediate effect of these improvements is less strik- 
ing than that resulting from great discoveries of gold and 
silver, but in the long run their influence on the product 
may be as great. They make the output of every mine 
greater than before. They make it possible to resume 
the working of mines that were formerly abandoned as 
unprofitable : of such there are many in different parts 
of the world. Even the refuse of former mining is now, 
in many cases, worked over again with a profit. 

5. The Stock of the Precious Metals slow to Change. — 
While the production of gold and silver is subject to 
greater variations than that of most other things, the 
total available supply of them is much less variable than 
that of most other things. This is a fact of great im- 
portance in relation to the value of money. It is due 
primarily to the good care men take of gold and silver, 
especially the former. Gold is not put to rough uses as 



148 Political Economy. 



the baser metals are, and worn out or destroyed; it is 
mostly treasured and kept.^ 

The result is that the world has now accumulated a 
great stock of gold, — in comparison, that is, with the 
amount produced from year to year. A good part of 
the gold on hand at present was produced centuries ago ; 
comparatively little of it is of recent production. It is 
estimated that the stock on hand is at least a hundred 
times as great as the average yearly product. 

It follows that the fluctuations of the yearly product 
have little effect on the total stock. If all the gold- 
mines in the world were closed for a year, there would 
be no unusual scarcity of gold. If they should all 
double their yield for a year the increase of gold would 
hardly be appreciable. The difference, either way, would 
not exceed one or two per cent, of the total quantity on 
hand. 

In the case of most other things the whole stock on 

1 Of course gold is not wholly exempt from destructive uses. 
"Watch-cases, jewelry, etc., are subject to some wear and tear, al- 
though the gold they contain is mainly saved and used over again. The 
gold used in gilding and plating, dentistry, etc., is almost wholly lost 
to the supply. The wear and tear of gold in the coinage is very slight. 
As used in the United States, to form reserves for the Treasury and 
the banks, there is no reason why gold coins should not last thousands 
of years. 

Silver, being only about one twentieth part as costly as gold, is 
applied to rough and destructive uses much more freely than gold, and 
is accordingly consumed much more quickly. Even in the form of 
coin, silver, being used as change, is put to a rougher use and is worn 
out more quickly than gold. 



Stock of Precious Metals slow to Change. 149 

hand is of recent origin, partly because they are in them- 
selves perishable, but more commonly because they are 
put to uses that destroy them, or soon wear them out. 
If the production of iron, or of coal, or of wool were to 
cease for a year, there would be a dreadful dearth of it ; 
if the production were doubled the stock for sale would 
be doubled also. We can readily see that the effect of 
the change on the values of these products would be 
vastly greater than the effect of a similar change in the 
production of gold on the value of that metal. 



CHAPTER XV. 

BANK CURRENCY. 

1. Bank Currency More Convenient than Coin. — Gold 
and silver coins are highly useful and even necessary, but 
they are inconveniently heavy for carrying in one's 
pocket.^ It was natural that civilized men should in- 
vent a plan for using mere titles to coin, or ready evi- 
dence of ownership in coin, while keeping the actual gold 
and silver stored in a few safe places where they could be 
readily obtained by any person holding the right to call 
for them. Sensible men would have been glad to pay 
something for the advantages of such an arrangement. 

It is the great discovery of modern Banking that a 
very admirable arrangement of this kind can be supplied 
to us free of charge, while those who perform the 
gratuitous service make a handsome profit from it. 

The secret of banking profits is that, for ordinai"y pur- 
poses, people like the right to get coin better than coin 
itself. We need only a simple way of passing the right 
from man to man just as we should pass coin. Bankers 
have supplied us with two very simple devices for doing 
this, namely, Bank Notes and Checks. The two differ in 
several important respects, but they are alike in this es- 

1 Two hundred dollars in gold weigh nearly a pound (Troy) ; the 
same amount in silver dollars weighs over fourteen pounds. 
150 



Bank Ciirrency. 151 



sential point, that the effect of each when used m making 
a payment, is to transfer from one person to another the 
risht of demandins; coin from a bank. Their differences 
arise from a difference in the form of holding the right. 

2. Two Forms of Bank Currency : Notes and Deposits. — 
A bank-note is itself a proof of the holder's claim upon 
the bank, as well as an instrument for transferring it. 
The holder of a deposit has no such ready evidence of his 
right. His name, with the amount of the deposit stand- 
ing to his credit, is written in the ledger of the bank ; but 
he has in his own hands no evidence of the fact. If he 
wishes to transfer any part of his right to another in 
payment for goods or services, he must write out an 
order, called a check, directing the bank to make the 
desired payment on his behalf. 

The receiver of the check has no guarantee, except 
the character of the giver, that the deposit exists. For 
use between strangers, therefore, and between persons 
who have not confidence in each other's honor, the 
depositor's right is much less convenient than the note- 
holder's. The same is true of persons living at a distance 
from banks. 

The note circulates as readily as coin wherever the 
rights given by the bank issuing it form part of the cur- 
rency. For these reasons the note is much more used in 
retail trade than the deposit, since in retail transactions 
the buyer and seller are seldom acquainted with each 
other. Besides this, the transactions are mostly too small 
in amount to make it worth while to write out checks. 



152 Political Economy. 



On the other hand, it is much safer to have a deposit 
to one's credit at a bank than to keep bank-notes in 
one's pocket or drawer. Notes are exposed to all the 
risks that coin would be exposed to : they may be lost, or 
stolen, or destroyed by fire, and the loss of the note means 
the loss of the right it gave. The deposit is safe from 
these and all other dangers except the failure of the bank. 
For men whose money transactions are large this is a de- 
cisive point in favor of the deposit rather than the note. 
The deposit liabilities of the banks in this country are 
several times greater in amount than their outstanding 
notes. 

It is important to see clearly that the proportion of 
bank currency held in each form is purely a matter of 
convenience for the holders, and is entirely in their con- 
trol, unless hampered by legal restrictions. The holder 
of notes can at any time convert his right into the other 
form by simply " depositing " them to his credit. The 
retail merchant does this daily with the notes received 
for his goods. 

The holder of a deposit can with equal readiness ex- 
change it for notes by simply presenting his check and 
taking notes in "payment." In fact, the two forms are 
freely interchanged day by day to suit the convenience 
of individual holders. In ninety-nine cases out of a 
hundred, what is popularly called " getting a check 
cashed " consists in getting a depositor's right to demand 
coin converted into a note-holder's right to do the same 
thing. To the bank it is a matter of indifference which 



Bank Currency. 153 



form of right the holder chooses. The effect on prices, 
or the value of money, is also the same in either case. 

"When a check is presented for payment, the person 
presenting it usually wishes, not so much coin, as pocket- 
money. For this purpose well secured bank-notes have 
everything to recommend them ; they are, in fact, the 
pocket form of bank currency. The admirable notes of 
our own national banks are as readily current as coin 
in every part of the Union. No person would think of 
declining them in payment of a check, unless he hap- 
pened to need money for use outside the limits of the 
United States. 

In the home trade of a country, such notes answer 
perfectly well as a reserve for paying deposits. So long 
as they are convertible into coin, on demand, the whole 
currency is kept on the coin basis. It has therefore 
been thought advisable, in most countries, to guard care- 
fully by law the issue of notes ; whereas, the use of de- 
posits and checks has been left without legal restriction, 
except in the case of our own national banks. 

3. The Source of Banking Profits. — The profits of 
banking are due to the fact that very few of the persons 
who get the right to demand coin ever exercise their 
right. The mere title to coin being the most convenient 
currency for practical use, the banks can safely count 
on having but few calls for actual coin. So long as there 
is general confidence in their ability to meet all their 
liabilities promptly and fully, they can safely bind 
themselves to pay on demand a much larger amount 
of coin than they have actually on hand. 



154 Political Economy. 

This is the reason why bank-notes and deposits affect 
the value of money. By using these as currency, each 
dollar of coin, while itself reposing in the bank-vaults, 
is made to do the work of several dollars. The active 
supply of money offering for goods becomes in effect as 
great as the supply of these rights to call for money. 
The rights are for the most part purely nominal no doubt : 
any attempt to enforce all of them simultaneously would 
show this ; but their effect on prices is just as great as 
if each dollar of them were a dollar of real money. 

If the banks were required to keep always on hand 
as much coin as they bind themselves to pay on demand, 
notes and deposits would have no effect on prices, and 
there would be no profit in banking. The gold and 
silver " certificates " issued by our Treasury furnish a 
good illustration of this : the full amount of coin they 
represent is required by law to be kept in the Treasury 
for redeeming them. The issuing of them is therefore 
a burden rather than a source of profit; and they add 
nothing to the volume of the currency, since they only 
take the place of the same amount of coin. 

On the other hand, the United States notes (or 
greenbacks) are, in this respect, a true bank currency. 
There are three hundred and forty-six millions of dol- 
lars ($346,000,000) authorized to be issued, and the 
amount of coin required by law to be kept for redeem- 
ing them is only one hundred millions. 

4. The Limit of Bank Currency. — Banks are primarily 
great lending institutions. Their profits come to them in 



Bank Currency. 155 



the form of interest on loans made to business men. 
They lend, not actual money, or coin, but the right to 
call on them for money. The borrower is credited with 
a deposit to the amount of his loan (or takes the bank's 
notes if more convenient), and the bank receives interest 
on that amount quite as if it had given him real money. 

Of course every such loan increases the bank's liability 
to pay real money. The loan at once becomes currency, 
for the borrower soon turns over his deposit-right (or the 
notes) to other men, some of whom may find actual coin 
more convenient for their purposes than the right to call 
on that particular bank for coin. The bank must there- 
fore be on its guard against giving men the right to 
demand coin more freely than the amount of coin it 
has on hand clearly warrants. Any overstraining of its 
credit, any whisper of a doubt as to its ability to meet 
all calls promptly and easily, would be quite sure to 
injure its business and might even cause a " run " on the 
part of those holding rights to demand money from it. 

The limit of safety for the bank itself is therefore the 
only necessary limit to its power of swelling the currency 
by the issue of notes and the granting of loan-deposits. 
But what is the limit of safety for the bank ? 

This is a question to which no very definite answer 
can be given. There is no one*rule good for all cases. 
Much depends on the nature of the*bank's business, the 
character of the people who hold rights against it, and 
especially on the strength of the public confidence in 
the management of the bank's affairs. Each bank must 



156 Political Economy. 



therefore judge by its own experience where the dauger- 
Hne begins. 

The most common occasion for the demand of true 
money instead of bank currency is connected with the 
external trade of each country and region. Bank cur- 
rency has a Hmited area of circulation, particularly the 
part of it that consists of deposit-rights to demand 
money. When any holder of such a right wishes to use 
it in making a payment at a distance, there is always 
a strong chance that real money will have to be sent. 

Now an increase of bank currency in any region causes 
an increased demand for goods. More things than usual 
are brought in from other places, and money has to 
be sent out to pay for them. The banks are called on for 
coin, in such a case, by those holders of bank currency 
who have the outside payments to make. For this 
reason the banks at the great centres of foreign trade in 
each country need to carry a strong cash reserve. 

5. Bank Currency of the United States. — We have 
now four kinds of circulating notes in use: 1. United 
States Notes or Greenbacks (known also as legal-tender 
notes, from the fact that they are "lawful money and 
a legal tender;" the other notes have not this quality). 
2. G-old Certificates. 3. Silver Certificates. 4. National 
Bank Notes. 

The first three of these classes are issued by the Treas- 
ury. They differ in that the notes are simple promises 
made by the United States to pay to any person present- 
ing them for redemption, the amount of money named 



Bank Currency. 157 



in each ; whereas the certificates certify that the amount 
of gold or silver named in each has been deposited in 
the Treasury, and will be paid to any person presenting 
the certificate and demanding delivery of the coin. The 
notes, as stated above, are supported by a reserve of one 
hundred millions in gold ; the certificates, as their form 
implies, are covered, dollar for dollar, by gold and silver 
coin on deposit in the Treasury. 

For the circulating notes issued by the national banks 
no specific reserve is required by law. They are amply 
secured by a pledge of United States bonds deposited in 
the Treasury by the banks, and each bank is required 
to keep the Treasury supplied with lawful money to the 
extent of five per cent, of its outstanding notes. Out of 
the fund thus provided, the Treasury pays lawful money 
{i.e., gold, silver dollars, or greenbacks) for all national 
bank notes presented for redemption. 

As to the deposit portion of our currency, the Acts of 
Congress draw a distinction between national banks in 
the leading cities and those in the rest of the country. 
City banks are required to limit their deposit liabilities 
to a hundred dollars for every twenty-five dollars of 
lawful money held as reserve : whereas the so-called 
" country-banks " are allowed to owe depositors a hundred 
dollars for every fifteen dollars they hold as reserve.^ 

Taking the bank currency of the United States as a 

^ It ought to be added that the country banks make little or no use 
of their special privilege. They keep, on the average, about as strong 
reserves as the city banks. 



158 Political Economy. 



whole, but omitting private and state banks, we find that 
at the middle of the year 1879 (the first year in which 
our present system existed on a coin basis) the propor- 
tion of bank currency to coin was a little less than eight 
dollars for one. In 1887 the ratio had fallen, by reason 
of the increase of coin in the Treasury and the national 
banks, to about six dollars for one. But the aggregate 
bank currency of the country is rapidly increasing, and 
seejns likely to reach, before many years, a proportion 
to the coin reserve not much below that of 1879.^ The 
note circulation, it is true, is decreasing ; by reason of 
the high price of United States bonds, which have to be 
placed in the Treasury as a security for notes issued, the 
banks find the issue of notes less profitable than the 

1 The figures for the years 1879 and 1887 were as follows, — not 
iucliuling notes in the Treasury and in the banks : 

1879 
Net Gold in the Treasury. $135,000,000 U. S. Notes in hands of luiblic. $205,000,000 
" " " Nat. Banks. 21,000,000 Nat. Bk. " " " " " 295,000,000 

Deposits of Nat. Banks . . 050,000,000 

Total $156,000,000 

Total $1,210,000,000 

1887 

Net Gold in the Treasury. $188,000,000 U. S. Notes $250,000,000 

" " Nat. Banks . . 152,000,000 Silver Certificates .... 150,000,000 

Nat. Bank Notes 250,000,000 

Total $340,000,000 Deposits of Nat. Banks . . 1,350,000,000 

Total $2,000,000,000 

I include the silver certificates among the circulating notes, but do 
not include in the coin reserve the two hundred and twenty million 
of silver dollars (■'^220,000,000) in the Treasury. The reason is that 
thus far the silver dollars have strictly nothing to do with the value of 
the certificates. See Chapter XVI., § 9 ; also note in Appendix. 



Bank Currency. 159 



granting of the right to call on them for money by check. 
Accordingly, deposits increased from about six hundred 
million dollars ($600,000,000) at the beginning of 1879, 
to one thousand three hundred and fifty million dollars 
($1,350,000,000) at the end of 1887. In the same period 
the note issues of the national banks decreased from about 
three hundred million dollars ($300,000,000) to about two 
hundred and fifty million dollars ($250,000,000).i 

There are many banking institutions in the United 
States which have not come into the national system. 
The " Finance Eeport " for 1887 gives statistics for 2,472 
private banks, loan and trust companies, and State banks 
other than savings' banks. These institutions are pre- 
vented from issuing notes by the heavy tax (ten per cent, 
a year) imposed on such ijotes by Act of Congress ; but 
they can lend the right to demand money by check with 
entire freedom. Their deposits payable on demand are 
returned at seven hundred and eighty million dollars 
($780,000,000). So far as regards the volume of our cur- 
rency, this amount must be added to the one thousand 
three hundred and fifty million dollars ($1,350,000,000) 
similarly payable by the national banks, making the 
total deposit currency of the country for the year 1887, 
two thousand one hundred and thirty millions of dollars 
($2,130,000,000).2 

1 It may be well to observe that the silver certificates issued by the 
Treasury Have more than supplied the place, in the ordinary circula- 
tion, of the retired bank-notes. 

2 The returns from private banks are very incomplete. There are 
in fact about four thousand of them in the United States. 



160 Political Economy. 

If we add to this sum the circulatmg notes of all 
kinds in the hands of the public, we find the total bank 
currency of the United States to be about two thousand 
seven hundred and fifty millions of dollars ($2,750,- 
000,000). This rests on a basis of gold in the Treasury 
and in the banks amounting to about four hundred 
millions of dollars ($400,000,000), or somewhat more 
than one dollar of gold for seven of bank currency. 

In other words, if all persons having a right to de- 
mand true money of the banks and the Treasury should 
suddenly and simultaneously demand payment, not much 
more than one dollar in seven could be paid in gold ; yet 
every dollar of the whole mass is doing the work of a 
gold dollar and (with the exception of the silver certifi- 
cates) is convertible into gold^ at any time, at the option 
of the holder. 

6. Effect of Bank Currency on Prices. — Though prices 
in the United States are obviously six or seven times 
higher than, without the aid of banking, our present 
stock of gold would make them, yet it would be a mis- 
take to suppose that our prices are six or seven times 
higher than they would be if bank currency had never 
been invented. The stock of coin itself would have been 
greater than it is, if its value had not been kept down by 
the introduction of bank currency. How much greater 
we cannot tell, because we do not know how great the 
difficulty would have been of adding a given quantity 
to the annual product ; nor do we know how much the 
higher value would have checked the consumption of 



Bank Currency. 161 



the precious metals in the arts. But it is certain that 
much more would have been produced year by year, and 
that a smaller amount would have been used in making 
watches, jewelry, etc. 

Of course, if the whole world had changed suddenly 
from the use of coin in all payments to a system of bank 
currency such as we now have in the United States, the 
immediate effect on prices would have been to multiply 
them by six or seven. But the introduction of banking 
has been gradual, — it is still but slightly developed in 
many parts of tlie world.^ Moreover the period of its 
introduction has been one of enormous increase in the 
demand for money, owing to the great increase in 
the production and exchange of commodities. 

Coming at such a time, and expanding gradually, bank 
currency has had for its chief effect the prevention of 
a great fall in prices. The world's stock of coin could 
not have been increased as rapidly as the goods to be 
exchanged have been increased in the past hundred 
years. Even with the great increase in the production 
of the precious metals since 1848, and the steady expan- 
sion of banking, the general level of prices is not much 

1 Deposit-banking can hardly be said to exist outside of the English- 
speaking countries. Circulating notes are used extensively in most 
countries ; but where circulating notes are preferred to deposits, many 
are likely to prefer coin to the notes. In France, for example, the 
whole volume of bank currency is not supposed to be equal to the 
amount of coin in the country. Obviously, the chief effect of a dispro- 
portional expansion of bank currency in any one country must be 
to send a part of its coin away to countries where banking is less 
developed. 



162 Political Economy. 

higher now than it was a hundred years ago. Had it not 
been for the growth of bank currency prices must have 
fallen very much. 

The most important effect of bank currency in the 
long run is the saving of labor it makes in providing 
the medium for exchanging commodities. It is essentially 
a labor-saving contrivance. By means of it the labor of 
one man is made to yield as much circulating medium 
as the labor of six or eight men without it. Thousands 
of men are thus released from the work of producing 
mere counters for making exchanges, and are employed, 
instead, in adding to the general stock of enjoyable com- 
modities. 

The value of money, with as without banking, tends 
in the long run to conform to the cost of producing 
the money-metal. The difference is that, with banking, 
the real demand for the metal at its natural value, 
is made much less than it would be without banking, 
and thus the production of it is confined to the most 
fertile sources of supply. Its value, therefore, corre- 
sponds to the cost of producing it where production is 
comparatively easy. If the whole demand for money 
had to be met with actual coin, less productive sources 
of gold would have to be resorted to, and the value of it 
would be permanently higher than it is. 

7. The Volume of Bank Currency Variable. — The use 
of bank currency introduces an element of unsteadiness 
into the circulating medium. The volume of it depends 
very much on the mere will of the bankers. There is 



Bank Currency. 163 



a constant temptation to expand the issue of it, because 
every addition brings additional gain to the banks. A 
currency consisting wholly of coin could not be thus 
increased at will. 

In times of business prosperity there is a strong de- 
mand for loans, and when business men are succeeding 
well, it seems safe to lend to them freely. The banks at 
such times expand greatly the deposit portion of the cur- 
rency, — the loans being given in the form of credits on 
the bank books, just as if the borrowers had actually 
deposited the sums borrowed. These credits become at 
once part and parcel of the bank currency acting on 
prices. 

As a result, we have periods of expanding bank cur- 
rency and rising prices. Such periods are times of great 
activity and seeming prosperity in business. Not only 
is the volume of currency increased, but its rapidity of 
circulation is quickened. The result is a steady and 
often rapid rise of prices, i. e., a fall in the value of 
money. Every rise of prices seems to bring gain to 
holders of commodities and to furnish a basis for new 
loans from banks, with consequent further increase of 
bank currency. 

The movement goes on until the banks reach the 
utmost limit of their lending power. The arrest of the 
expansion is usually attended by business failures. Men 
who entered on speculative enterprises, counting on con- 
tinued loans from the banks, are forced into bankruptcy 
when new loans can no longer be obtained. Then begins 



164 Political Economy. 



a period of contraction in bank currency. The banks are 
always heavy losers by business failures : when these 
begin, they scrutinize sharply all applications for loans 
and reject those that are in the least doubtful. Further, 
the changed condition of affairs causes men of undoubted 
credit to have less desire for loans than they had while 
business was prosperous. The result is a general shrink- 
age of bank currency. There is at the same time a les- 
sened rapidity of circulation. A gradual decline of prices 
is the necessary consequence. 

These changes in the value of money would probably 
happen to some extent, even if bank currency did not 
exist. I think they are primarily due to the fact that 
savings intended for investment, whether directly or by 
loan, are ahvays in the form of money. When savings 
are promptly and fully invested, the currency, whatever 
its character, is kept completely and actively in circu- 
lation. When savings accumulate, unemployed, in the 
hands of those who make them, the supply of currency 
offering for goods is necessarily diminished. 

The circumstances that cause banks to enlarge or to 
curtail their loans in bank currency, would cause them 
to enlarge or to curtail their loans, if they had nothing 
but coin to lend. The use of bank currency simply in- 
tensifies the evil very much by giving a wider scope for 
enlargement and contraction of loans. 



CHAPTEE XVI. 

QUESTIONS BETWEEN GOLD AND SILVER. 

1. Contrast between Gold and Silver. — In the foregoing 
chapters silver and gold have been spoken of together, 
as if both could be used as money, side by side, on a 
footing of perfect equality. We must now consider some 
difficulties that are met in the attempt to use them in 
that manner. 

First, however, we must note an important difference 
between the two metals. Weight for weight, gold is at 
present (1897) worth more than thirty times as much 
as silver. If we compare them by bulk, the contrast is 
still greater, — a cubic inch of gold being worth fifty-six 
times as much as a cubic inch of silver.^ 

2. Superiority of Silver for Small Money. — This wide 
difference in value gives each metal an obvious advan- 
tage over the other for one of the uses of money. As 
material for coins of small value, silver is much more 
suitable than gold. Dimes made of gold would be almost 
invisible. Even the one-dollar gold piece, formerly coined 
at our mints, was found to be inconveniently small, and 
the coinage of it was given up. Coins so diminutive are 

1 The specific gravity of silver is 10.47 ; that of gold is 19.34. 

165 



166 Political Economy. 



difficult to handle and are constantly in danger of getting 
lost. 

For small money, then, silver has everything to recom- 
mend it over gold. But at the other end of the scale, it 
must be admitted that silver is subject to a very serious 
drawback. Even so small a sum of it as ten dollars 
makes an awkward package for carrying in one's pocket. 
A million dollars' worth of silver, at its present value, 
weighs nearly sixty tons. 

3. Superiority of Gold for Large Transactions. — For 
large transactions, gold is vastly more convenient than 
silver. The labor of transporting a given sum in gold 
is less than one-twentieth part as great as in the case 
of silver. The space required for holding it is only one- 
fortieth part as great. Any one who has had exper- 
ience in guarding valuable articles, knows how much 
the difficulty increases with increase of bulk. It is 
many times harder to make a large "strong box" than 
a small one. 

Now the financial affairs of a great commercial nation 
require the constant care and handling of large sums in 
coin. In the movement of such amounts as are daily 
passing about in the settlement of accounts between 
banks, and in the operations of the national Treasury, 
the difference in favor of gold amounts in the course 
of a year to a very considerable sum. 

Nor is this a matter affecting the bankers alone, or 
even chiefly. The saving by the use of gold rather 
than silver is a gain to the whole community. Like 



Questions between Gold and Silver. 167 

every other labor-saving contrivance, it lightens the 
work of production and exchange by supplying a more 
convenient, instead of a less convenient medium. It 
gives precisely the same advantage as the use of silver, 
rather than copper or tin, gives in the case of our 
smaller coinage. The benefit accrues to all who have 
occasion to use money, that is to the whole community. 
Whatever makes banking difficult and costly, is sure, 
in the long run, to increase the cost to the community 
of the services which the bankers render. 

4. The Double Standard. — All men agree that both 
silver and gold are needed as money, since each serves 
a purpose for which the other is much less suitable. But 
when we come to the question of the best method of 
obtaining the use of the two metals in coinage, we find 
ourselves at once in a region of doubt and controversy. 

It was once supposed that a nation wishing to have 
the use of the two metals as money, needed only to coin 
both of them freely. But experience has clearly proved 
this to be a mistake. Every country that has tried it has 
found that the result is to give the use of one metal 
only. 

The reason is clear. The adoption of two sets of coins 
as full money, is in fact an attempt to have two stand- 
ard units for measuring value. The two may indeed be 
accurately adjusted at the start, so that a dollar of the 
one sort shall have precisely the same value as a dollar 
of the other sort, — comparing them simply as (what 
they are in truth) pieces of metals produced by labor. 



168 Political Economy. 

But the difficulty is that each is produced independently 
of the other, and the cost of production of the one may 
change without a corresponding change in the cost of 
the other. When this happens (and it is constantly 
happening in the case of gold and silver) the two sets 
of dollars become unequal in natural value ; the country 
acquires in consequence two different standards or meas- 
ures of value. Hence the name of Double Standard 
applied to this arrangement. 

Now to set up two different measures of value would 
be as absurd and inconvenient as to adopt two yard- 
sticks of unequal length, or two bushel measures of 
unequal capacity. The law, where the double standard 
prevails, attempts to keep the two kinds of money equal 
in value by providing that each kind shall be lawful 
money and a legal tender to any amount. This does 
indeed cause the two kinds to have equal value {i. e., 
market value) so long as both continue to circulate : but 
the effect, in the end, is to drive one of them out of 
use as money. It is the fatal weakness of the double 
standard that, while in theory it is a plan for giving us 
the use of both gold and silver as money, it is in practice 
a plan that limits us to one of the two. 

5. Double Standard in the United States. — The practi- 
cal working of the double standard may be readily seen 
by studying the history of it in our own case. Our first 
national coinage was made under an Act of Congress 
passed in 1792. Under this act gold and silver were 
coined free of charge for all persons sending in the 



Questions hetween Gold and Silver. 169 

necessary bullion, — one pound of gold being made into 
as many dollars as fifteen pounds of silver. Coins of 
either were made a " lawful tender in all payments what- 
soever." 

The ratio of 1 = 15 was approximately correct at the 
date of the Act. But silver was at that time slowly 
declining in value as compared with gold, owing to 
increased production of it in Mexico. By the year 1800 
one ounce of gold was worth 15 2 ounces of silver. 

In this state of things men ceased to carry gold to our 
mints to be coined. They even found a profit in sending 
out of the country the gold already coined. For fifteen 
thousand dollars in gold one could buy silver enough 
abroad to make fifteen thousand five hundred silver 
dollars, thus gaining five hundred dollars by the oper- 
ation. As a result the gold coin of the United States 
disappeared from circulation, and the country was left 
with silver alone. 

In 1834 an Act of Congress was passed to restore the 
use of gold. ' By this Act it was ordered that a less 
quantity of gold should be used in* making the gold 
coins thereafter. In the new arrangement one ounce of 
gold was coined into as many dollars as sixteen ounces 
of silver.^ 

^ The amount of pure gold in the eagle was cut down from 247^ 
grains to 232 grains. The quantity of pure silver in the silver dollar 
was and is 371^ grains. 23.2 : 371^ = 1 : 16 — . Our standard gold and 
silver contain one part alloy for nine of pure gold or silver ; the weight 
of the silver dollar-piece is therefore 412J grains (371i of silver and 
41i of alloy). 



170 Political Economy. 

Just before the passage of the Act silver had fallen 
to about 16 = 1, but it rose again and remained, in the 
markets of the world, above our coinage valuation. 
There was, therefore, in the new adjustment, the same 
reason for exporting our silver coins to pay for gold, as 
there had been in the previous adjustment for the reverse 
operation. 

The consequence was that all full-weight silver coins 
presently disappeared from circulation, and their places 
were taken by the new gold coinage. Even the small 
change disappeared with the rest, excepting the pieces 
that were too much worn to be sold as silver. By 1850 
we had a coinage consisting almost exclusively of gold, 
with worn Mexican silver for change. New silver pieces 
were coined from time to time by the Government, but 
they disappeared as speedily as they were issued. 

6. Gold Standard with Subsidiary Silver. — In order 
to remedy this evil, an Act was passed in 1853 which 
provided that the smaller silver pieces to be coined 
thereafter should contain about seven per cent, less silver 
than the former issues.^ This device was adopted in order 
that the new issues might be worth less as mere silver 
than as coins of the United States, and should therefore 
always stay in circulation. In other words, the amount 
of silver in the half dollar, the quarter, the dime, etc., 
was known and intended to be worth less than the sum 
the coin was to pass for. 

^ One dollar of the new silver change contains only 384 grains of 
standard silver, whereas the silver dollar-piece weighs 412| grains. 



Questions hchvecyi Gold and Silver. 171 

The new coins were not made a legal tender for sums 
exceeding five dollars. The privilege of getting silver 
coined into these pieces was conferred on the Treasury 
alone, in order to guard against excessive production of 
them. 

These light-weight silver coins, of limited legal-tender 
quality, are called a subsidiary coinage. The result of 
the Act of 1853 was to give us, in practice, the single 
gold standard with a limited supply of silver coins for 
small payments.^ The arrangement worked well, and 
remained in operation until the over-issue of inconvert- 
ible currency during the Civil War drove all sorts of 
metallic money out of use. It is, so far as experience 
goes, the only plan that succeeds in giving a country 
the use of both metals. 

' Since the Eesumption of Specie Payments at the be- 
ginning of 1879 we have again had in practice the single 
gold standard, with the subsidiary silver coins provided 
by the Act of 1853. Unfortunately, however, we have 
also bad peculiar enactments regarding the silver dollar 
which threatened, until repealed, to bring us again into 
the troubles of the Double Standard, 

7. The Silver Act of 1878. — After the change of ratio 
in 1834, owners of silver ceased to get it coined into, 
dollars. In the year 1873 the right of getting it so 

1 It was still the right of any person having silver bullion to get it 
coined into dollars of 412J grains standard silver. But 412|^ grains of 
standard silver could be sold for more than a dollar ; so no man cared 
for the privilege of getting it coined into a dollar. 



172 Political Economy. 



coined was abolished.^ Shortly after this was done the 
value of silver began to decline. By the year 1876 it 
had fallen so much that 412^ grains of silver could be 
bought for ninety cents in gold. 

The primary cause of the decline was the discovery 
of new and very productive mines in Colorado and 
Nevada. The effect of the great increase of production 
that followed was intensified by the cessation of silver 
coining by Germany, France, and Italy. The mints of 
those countries had previously absorbed a considerable 
part of the current product. By the stoppage of most 
of the coinage demand for new silver, the metal in the 
uncoined state ceased to have its value steadied as the 
value of money is steadied. It became possible for 
the value of silver bullion to fall indefinitely below the 
value of the same quantity of silver in the form of" 
coin. In a word, silver bullion could fall, and did fall, 
in value, just as copper or iron fall when the production 
is increased. . 

The producers of silver in this country were naturally 
clamorous to regain the right of converting their product 
into money. They were joined in this demand by many 
unthinking persons who imagined the increase of silver 

1 The Act of Congress authorizing the coinage of the trade dollar 
contained the clause, " The silver coins of the United States shall be 
a trade dollar, a half dollar or fifty cent piece, a quarter dollar, etc." 
The old silver dollar (412i grains) was omitted from the list. The 
trade dollar was intended for use in the Oriental trade ; its weight was 
made 420 grains, in order to match the currency already in use in that 
trade. 



Questions between Gold and Silver. 173 

money would be a good thing for the whole community. 
The agitation led to the passage, in 1878, of an Act of 
Congress providing for a renewal of the coining of silver 
dollars. 

The Act required the Secretary of the Treasury to 
buy silver at the market price, and coin not less than 
two millions, nor more than four millions, of dollars' 
worth each month. Private owners of bullion were not 
entitled to have it coined at their pleasure, as they had 
been previous to 1873. 

This act was in force until 1890. In the twelve years 
of its operation, three hundred and seventy-eight mil- 
lions of silver dollars were coined at our mints, forty- 
seven times as many as had been coined during the 
whole previous history of the United States. Of this 
enormous mass only one-sixth part could be kept in cir- 
culation ; the rest lay in the vaults of the Treasury. 
Partly in order to give this stored silver a seeming-use 
as currency, partly also to cover the cost of buying it, 
certificates of deposit, a new form of government notes, 
were issued. At first these silver certificates were for 
sums of ten dollars and upwards. In 1887 they were 
issued of lower denominations down to one dollar. The 
volume of them in circulation increased rapidly after 
this change, rising from eighty-eight millions in 1886 to 
nearly three hundred millions in 1890. 

8. Silver Act of 1890. —In July, 1890, an Act was 
passed requiring the Treasury to purchase four and a 
half millions of ounces of silver every month, about 



174 Political Economy. 



double tlie quantity ordinarily purchased under the Act 
of 1878. The silver thus purchased was to be paid for, 
not by the issue of further silver certificates, but bv add- 
ing to the issue of legal tender notes. These new notes, 
like the older greenbacks, were made redeemable in coin. 

The Act of 1890 was at variance with every sound 
principle of finance. The note currency had already 
been inflated beyond the limits of safety; yet this Act 
provided for additional issues to the extent of over 
$50,000,000 a year. Even before this Act was passed, a 
considerable export of gold had taken place; after its 
passage the export movement increased. Presently the 
calls for gold to be sent abroad became associated with 
calls of a different sort, Holders of notes, distrusting the 
ability of the Treasury to keep the increasing volume of 
paper at par with gold, began to take early measures for 
protecting themselves against loss, by presenting the 
notes for redemption. Others, looking forward to a pre- 
mium on gold, took the same course with a view to 
profit. 

In March, 1890, the stock of gold in the Treasury was 
$820,000,000. By November, 1893, half of this stock 
liad been drawn out. Moreover, nearly half of what was 
left belonged to the holders of outstanding certificates of 
deposit; so that the net amount owned by the Treasury 
was only $83,000,000. This was the visible reserve 
against nearly ten times that amount of notes outstand- 
ing. Further, the reserve was steadily dwindling, 
whereas the volume of notes was increased every month 



Questions between Gold and Silver. 175 

by issues made in payment for silver. The amounts out- 
standing in 1893 were as follows : 

Legal Tender Notes, old issue . . $346,000,000 

Act of 1890 . 150,000,000 

Silver Certificates 330,000,000 



Total $826,000,000 

In form, the silver certificates give the holder no right 
to demand gold. But their presence in the currency has 
the same inflating effect as an equal amount of green- 
backs. Wiien, by reason of over issue of paper cur- 
rency, a demand arose for redemption, it was gold alone 
that was wanted. The legal tender notes were used in 
making the demand. These are " redeemable in coin," 
and technically silver dollars are coin. But the faith of 
the nation has been repeatedly pledged to keep the sil- 
ver money at par with gold. There is only one way of 
fulfilling this pledge; and that is by giving those who 
present notes for redemption in coin, the right to choose 
gold or silver coin at will. If the Treasury should dis- 
criminate against silver by forcing it on the public cred- 
itors, the equivalence of our gold and silver coins would 
be at an end. Gold would go to a premium. 

9. Silver Panic of 1893. — It was obvious that the Act 
of 1890 was bringing the currency of the country to a 
silver standard. The situation was the more disquieting 
because, in spite of the large purchases, silver had de- 
clined greatly in value, and was still declining. In the 
face of this decline of value, the production of it had 



176 Political Economy. 



greatly increased ; so that there seemed to be no assign- 
able limit to the threatened depreciation of our money 
standard. 

In the summer of 1893 the general anxiety as to the 
future of the currency brought on a severe panic and 
wide-spread business distress. A special session of Con- 
gress was called to consider the situation. The result 
was the repeal of the Silver Act of 1890. 

Unfortunately the repeal came too late. The drain of 
gold went on. Various national banks aided the Treas- 
urj' by giving it gold in exchange for legal tender notes; 
but the trouble was on too great a scale to be remedied 
in that way. At the beginning of 1894 the government 
had to sell bonds for gold in order to replenish the 
reserve; and the operation had to be repeated several 
times later. Altogether nearly $300,000,000 in gold had 
to be raised by sale of bonds before the crisis was passed. 
No other course was possible without national dishonor. 

In the troubles of 1893 and the following years, 
the unwisdom of our silver legislation was strikingly 
exposed. The Treasury had accumulated about sixteen 
thousand tons of silver and in doing so had involved 
the industry of the country in a ruinous collapse. In 
the resulting financial stress, the stored silver was sim- 
ply useless. Nobody wished to take it in payment of 
any claim ; nor did any " friend of silver " come forward, 
offering the Treasur}' gold in exchange for silver dollars. 
As before and since, the piled up silver was only a bur- 
den ; so far as the purposes of a reserve are concerned, 



Questmis between Gold and Silver. 177 

it raight as well have been still lying in the depths of 
the earth. As each "dollar" of it is now worth only 
about fifty cents, there is no probability that it will 
ever be available for use as currency even in redeeming 
the silver certificates. Nor could it now be sold for 
much more than half of what it cost. It will probably 
lie in the Treasury for many a year to come, a standing 
memorial of legislative folly. 

The experience of the past few years has been costly ; 
it is to be hoped that the people of the United States 
will remember the lesson. It had already been shown 
many times over, that the so-called "double standard" 
is impossible in practice ; that while every nation may 
choose freely between gold and silver, it cannot have 
both as full monetary standards. We have simply given 
the world one more illustration, on a colossal scale, of 
this elementary truth. 

In spite of errors and threats of lapse, we still have the 
gold dollar as our monetary unit. But it cannot be said 
that onr currency is in a safe or satisfactory condition. 
Some features of our laws about money are at variance 
with reason and experience; unless promptly reformed, 
they are likely to hinder seriously the commercial welfare 
of the country. For some suggestions on the subject, see 
Appendix. 

10. International Bimetallism. — A movement has re- 
cently been set on foot aiming to bring the chief com- 
mercial countries into a general agreement regarding the 
use of gold and silver as money. The advocates of this 



178 Political Economy. 

plan contend that, if the chief nations should agree to 
coin both metals freely, all using the same mint ratio 
of values, both metals would remain permanently in 
circulation in each country. 

They argue that the failure of the Double Standard 
hitherto has been due to the want of uniformity in the 
treatment of the two metals in different countries. They 
point, for example, to the fact that when the United 
States, under the Act of 1792, found it impossible to 
keep gold in use as money, our coinage laws placed the 
ratio at 1:15, whereas France used the ratio 1:15^. In 
that situation the gold, they say, went to France simply 
because that country set its coinage value higher in 
terms of silver than the United States did. 

The bimetallist theory, briefly stated, is that if the 
great commercial nations should agree on a common ratio 
for gold and silver ; and should all adopt the double stand- 
ard on that basis, the two metals would remain perma- 
nently in circulation everywhere, with the relative value 
agreed upon. There can be no doubt that such an ar- 
rangement would prevent wholesale interchanges of gold 
and silver between countries. But it does not follow that 
it is the only, or even the best, solution of the coinage 
question. 

The general adoption of the single gold standard, with 
subsidiary silver coins, would equally cut off the motive 
for mere interchange of coins between countries. 

11. Weakness of the Bimetallic Theory. — The bimetal- 
list contention that two metals with full legal tender 



Questions hetween Gold and Silver. 179 

quality are better than one, or are in the least neces- 
sary, has not been successfully maintained. Two vari- 
able standards expose us to two sets of variations in 
the value of money, instead of one. The argument that 
there is not enough gold to suffice for all countries, 
ignores the fact that the modern way of using metallic 
money, makes a dollar go as far as seven or eight dollars 
went two hundred years ago. The age in which metallic 
money is passing out of use as active currency, and into 
use as a mere reserve for the active currency, is a time 
when gold may safely be adopted as the single standard 
for large payments. Bank currency based on gold may 
far exceed the total, supply of both gold and silver. 

The proposition that the comparative value of gold 
and silver may be permanently controlled by inter- 
national agreement, is one that can hardly be admitted 
without better evidence of its soundness than has yet 
been supplied. No man would maintain the same doc- 
trine with reference to any other two products of labor, 
even in cases where the one is largely a substitute for 
the other: e.g., beef and mutton, corn meal and rye meal, 
tin and zinc. It is the common mark of all foolish 
schemes for " improving " the world's currency, that they 
set out by falsely assuming a fundamental difference 
between money and all other products of human labor. 
Any scheme is sure to fail in the long run, if it under- 
takes to put the material of our money under other con- 
trol than that to which the value of all other products 
of labor are subject, namely, the cost of its production. 



180 Political Economy. 



The bimetallic theory holds that the value of gold may 
be made to follow the cost of silver, and the value of 
silver the cost of gold, simply by the force of laws and 
treaties.^ 

If the governments of the leadinjif countries should 
attempt to fix the comparative value of tin and zinc by 
international agreement and force of law, we readily see 
that this would not be enough to ensure success. The 
agreeing governments would have to undertake the duty 
of keeping the market supplied with each metal at that 
value, or run the risk of having the supply of one or the 
other fall short of the demand, or even fail entirely. 

It has not been shown that international bimetallism 
could be counted on to give us a desirable proportion of 
each metal, or indeed both metals in any proportion. The 

1 The advocates of the theory lay much stress on what they assume 
to be a powerful check against the withdrawal of either metal from 
use as money, owing to a fall in the value of the other. The with- 
drawal of gold from use as money would cause an increased supply 
and a decline of its value, as a material for use in the arts : on the 
other hand, the increased demand for silver as money to take the 
place of the gold withdrawn, would cause a rise of its value. Thus, 
they hold, the two metals would tend to keep the relative values im- 
posed on them by the interiiational league. All this may be admitted 
so far as temporary changes are concerned ; but it does not touch the 
fundamental question of the permanent supply of both metals, espe- 
cially that proportional supply of each which may best serve the 
public convenience. 

If, for example, international bimetallism had been adopted when 
the ratio was 1 = 10, does any person suppose that gold would now be 
in use as money at that ratio unless the governments of the various 
countries should have kept up the supply of it at a loss to themselves? 



Questions between Gold and Silver. 181 

agreeing countries might, in the long run, find themselves 
limited to the use of one metal, unless their governments 
should assume the burden of keeping up the coinage sup- 
ply of both at the agreed ratio, in case private producers 
of either metal should cease to offer it for coining. 

12. The Nations not likely to Agree in restoring Silver. — 
Finally, there is little prospect of any international 
compact on the subject of bimetallism. There have been 
several conferences of delegates from the chief commer- 
cial countries, but no progress has been made towards 
a general agreement. Great Britain and Germany are 
unwilling to abandon the gold standard, and without 
their co-operation, a bimetallic league would have poor 
chances of even temporary success.^ 

Meantime all the great commercial nations have closed 
their mints to the further coinage of silver. The value 
of silver has now fallen so far, and its production has 
increased so much in spite of the fall in value, that it 
would be an act of daring rather than of statesmanship 
to propose, whether with or without an international 
ngreement, a restoration of unrestricted coinage at the 
old European ratio of 1 = 15 2. 



1 If the nations ever make general agreements on the subject of 
money, it is to be hoped that they may adopt a common unit of coin- 
age as well as a common treatment of gold and silver. What could 
be more inconvenient or absurd than the present confusion of mone- 
tary units ? One dollar of United States money = 4s. l^d. English 
money = 5.18 francs of French money = 4.2 marks of German money 
= 2.6 florins of Dutch money, etc. 



CHAPTER XVII. 

INCONVERTIBLE LEGAL-TENDER NOTES. 

1. Character of Inconvertible Notes. — There is a squalid 
imitation of bank currency known as " inconvertible " or 
" irredeemable " notes. These differ from true bank-notes 
in the one point that makes the latter acceptable : they 
give the holder no title to coin. No provision is made 
for paying coin to such as may desire it : hence the name 
of this species of currency. 

Inconvertible notes are usually issued by needy gov- 
ernments as a way out of financial embarrassment. They 
are declared by law to be " lawful money and a legal 
tender;" that is to say, the offer of them in payment of a 
debt is to be regarded by the courts as if it were an offer 
of real money. This, provision gives them a forced cir- 
culation. Though everybody knows that they give the 
holder no real title to coin or to anything else of value, 
yet the fact that they can be used in paying debts makes 
everybody willing to receive them. 

If the issue of such notes were kept somewhat with- 
in the amount the community would naturally use of 
redeemable notes, no great harm would be done. The 
trouble is that no government has ever resorted to the 
issue of inconvertible currency without carrying it far 
182 



Prices in Depreciated Notes. 183 

beyond this limit. Our own country suffered much from 
the evil before and during the Eevolution, and again 
during the Civil War. 

2. Effects of Inconvertible Currency on Prices. — In 

considering the effects of inconvertible currency, it 
is necessary to distinguish two cases, or stages. When 
the issue of inconvertible notes is begun in a country, the 
first effect is simply to increase the general currency, 
and raise all prices. The rise of prices causes a change 
in the external trade of the country; fewer goods are 
sent abroad and more goods are brought in. To pay the 
balance thus accruing, the coin and notes convertible into 
coin are drawn on, — the inconvertible notes being of no 
use for that purpose. 

Every addition made to the inconvertible paper is fol- 
lowed by the gradual disappearance of an equal quantity 
of the sound currency. While any of the latter remains 
in circulation, the value of the new notes is not affected 
by their inconvertible character. The new issue simply 
has the effect of raising all prices and thus lowering the 
value of all money. The fall is checked by the continual 
lessening of the good money. 

But when the issue has been so increased .that all the 
sound currency has been displaced from the circulation, 
a new stage is entered upon. Every addition of irredeem- 
able notes after that point is reached, is followed by a 
corresponding depreciation of the whole mass. If the 
quantity be doubled, prices will be doubled also, — each 
dollar becoming worth only half of a real dollar. 



184 Political Economy. 

In a country that has a depreciated currency of legal- 
tender paper, the prices of commodities are fictitious 
rather than real prices. Though the terms of true 
money continue to be used, they have no reference any 
more to true money, but to the pieces of stamped paper 
arbitrarily substituted for money by force of law. In 
order to discover the real price of any article one must 
ascertain the price of the currency itself. 

For example, in July, 1864, two dollars and a half 
of United States notes (legal tender) could be bought for 
one dollar in gold. In that condition of things, the real 
price of an article selling for twenty dollars in paper 
was only eight dollars. 

3. Injustice Caused by Excessive Issues. — Inconvertible 
currency, when issued in excess, becomes the instrument 
of great injustice. For instance, a man who borrowed 
$1,000 in this country in 1861, when dollars were real 
dollars, to be paid back in three years, was enabled by 
an unjust law to discharge the debt in 1864 by paying 
$400. The overissue of legal-tender notes has the effect 
of confiscating a part of every outstanding claim. A law 
authorizing one citizen to defraud another would not be 
more unjust, 

A similar injustice is inflicted on debtors when a 
depreciated legal-tender currency is restored to the specie 
standard. Debts which were incurred in the time of 
depreciation have to be paid off in dollars of higher value 
than those in which they were incurred. A larger quan- 
tity of wealth has to be paid than the agreement really 
stipulated. 



Evil Effects of Overissue. 185 

This latter hardship is usually suffered on a great 
scale by the offending government itself, when it sets 
about retrieving its affairs in honorable ways. In the 
first place, it must redeem the depreciated notes them- 
selves in real money, although for all of them issued after 
depreciation began, it received less than the value of real 
money. Secondly, a time of overissue of notes is nearly 
always a time of copious borrowing on the part of the 
government. The greater the depreciation of the cur- 
rency, the greater the borrowing has to be ; for the price 
of everything the government has to buy, as well as the 
wages it has to pay to its soldiers and workmen, are 
raised by every depreciation of the currency. 

In other words, the dollars it borrows and spends are 
no real dollars, though it is in honor bound to treat them 
as if they were. The currency which it has itself cre- 
ated, and which it compels private citizens to accept as 
money, it cannot well decline to receive from those who 
subscribe to its loans. Its debt becomes swollen in con- 
sequence of the depreciation of the currency, far beyond 
the figures it would have reached if its affairs were con- 
ducted on the basis of coin. Each dollar of this inflated 
indebtedness has later to be paid in real money, when 
the time for payment arrives. It has been estimated that 
the National Debt incurred by the United States dur- 
ing the Civil War was greater by eight hundred and 
sixty million dollars ($860,000,000), than it would have 
been if the overissue of greenbacks had been avoided.^ 
^ Bowen, American Political Economy, p, 408. 



186 Political Economy. 



4 No Justification for making Notes Inconvertible. — 

The evils attending the overissue of inconvertible cur- 
rency being so great, no wise statesman could advocate 
the use of so perilous a substitute for money. If a gov- 
ernment wishes to issue circulating notes, there is no 
sound reason why it should seek to escape the obligation 
of redeeming in coin such of them as may be presented 
for redemption. 

The whole saving effected by making the notes incon- 
vertible is measured by the amount of reserve that would 
have to be kept for redeeiping them. A government, at 
least one that always makes good its promises, enjoys 
higher credit than the banks. Banks find a twenty-five 
per cent, reserve against circulation sufficient to maintain 
the convertibility of their notes. It is probable that 
a government which kept its issue within wise limits, 
would not need more than a twenty per cent., or even 
a fifteen per cent, reserve in specie. That for the sake 
of avoiding this slight burden, any government should 
subject its citizens to the possible wrongs and injuries 
of a depreciated currency, is a circumstance not easily 
explained. The justification alleged is usually a sup- 
posed necessity. But whatever momentary advantage a 
government gains by resorting to inconvertible notes, it 
gains at the expense of its own citizens. No other form 
of tax could be more burdensome or unjust. 

5. Except in Special Cases, the Value of these Notes 
depends on the Quantity Issued. — It might be supposed 
that the value of inconvertible notes would depend on 



Law of Value of Irredeemable Notes. 187 

the prospect of their ultimate redemption. This, how- 
ever, is not the case. Their value would be the same 
even if it should be expressly enacted that they are 
never to be redeemed. So long as they constitute the 
working currency of the country, prices of commodities 
expressed in that currency are governed by the quantity 
circulating and the rapidity of circulation, just as in 
the case of true money. 

The prospect of speedy redemption may indeed limit 
the depth of depreciation. Notes that are certain to 
be redeemed a year hence cannot fall below the specie 
standard by more than the current rate of interest. If 
they did, a part of them would be quickly taken up and 
held as an investment. The promise of early redemp- 
tion may thus raise the value of inconvertible notes; 
but it does so by lessening the quantity of them in 
actual circulation. 

Again, if a doubt should spring up as to the ability 
and intention of the issuing government to maintain 
the legal-tender character of its notes; or if, as was the 
case in the last stages of the Southern Confederacy, 
the continued existence of the government itself should 
become doubtful, the notes in circulation may suffer a 
great depreciation, or even lose all exchange value. The 
explanation is that merchants and others decline to 
receive them any more for goods. They prefer to keep 
their stocks unsold rather than to sell them for notes 
which may become valueless on their hands. 

A somewhat similar case occurs when a serious in- 



188 Political Economy. 



crease of these notes is in prospect, even where no doubt 
exists as to the ability and intention of the government 
to maintain their legal-tender quality. The notes already 
in circulation may suffer serious depreciation, even be- 
fore any of the new issue appear. Holders of goods 
usually raise their prices at once. This rise makes it 
impossible to sell at once all they ought ordinarily to be 
selling : the supply of currency is not, at the moment, 
sufficient to maintain prices at this higher level. But 
the impending increase of currency will make it pos- 
sible presently to sell the whole product at the advance; 
meanwhile it is more profitable to raise prices at once, 
even at the cost of diminished sales, than to sell the 
whole stock at the former prices. 

These are not exceptions to the general principle of 
prices. They are rather illustrations of its working 
under exceptional conditions. "Whatever the currency 
of a country, its prices must, in the long run, conform 
to the demand and supply of that currency. 

6. An Inflated Currency does not promote Industry. — 
Many persons are led to favor the use of inconvertible 
notes by a mistaken view as to their effects on trade. 
These persons start out with the assumption that plenty 
of money is essential to prosperity. As inconvertible 
notes can easily be issued in any desired quantity, they 
hold that this form of currency is superior to every 
other, and ought to be freely used. 

Their argument rests on a very obvious fallacy. 
" Abundance of money " is a phrase that has two very 



Infiation does not Make Trade Easier. 189 

different meanings. It may mean a large quantity of 
money in the sense of a great many dollars ; or it may 
mean a large supply of money in comparison with the 
demand for it, — in comparison, that is, with prices. 

Money may be abundant in the first sense without 
being so in the second. Obviously it is only abun- 
dance in relation to prices that can have any stimulat- 
ing effect on trade. Increase of the currency has, for 
a little while, the effect of making things sell more 
rapidly. It creates the situation spoken of in Chap- 
ter XIII., § 10. But as soon as prices are raised to 
correspond with the increase of money, trade becomes 
as difficult, and money, relatively to the demand for it, as 
scarce as it was before. 

The more dollars we have in circulation the less each 
dollar is worth. With a currency of ten thousand mil- 
lions it would be as easy to get ten dollars as, with one 
of a thousand millions, it would be to get one dollar. 
But ten dollars in the one case would be no better for 
a man, would buy no more things, than one dollar in 
the other case. This is the inevitable result of increas- 
ing the currency ; it raises all prices. 

While the increase is going on, it tends, no doubt, to 
quicken the sales of goods. But in order to keep up the 
effect, we should have to be always adding to the issue.^ 
This was amply shown in the inflation period of our 

1 It is probable that even this would lose its quickening effect before 
long. People would soon perceive that the currency was gradually 
depreciating, and would learn to allow for it in advance. 



190 Political Economy. 



own greenbacks. Once the prices of things had time to 
get adjusted to the increased volume of currency, the 
seeming plentifuhiess of money ceased. Trade was never 
duller, money never seemed scarcer than during parts of 
the 2:)eriod when, measured by the number of dollars, 
we had a great abundance of currency. Inflation of the 
currency in the end defeats itself. Besides the ruinous 
injustice it works, it ends by making all trade more 
uncertain and difficult than it is on the more solid basis 
of hard money. 

The permanent difficulties of trade are not at all due 
to scarcity of money. The hard thing is not so much 
to sell, as to sell at a satisfactory profit. Now the 
question of profit, as a matter of selling, turns, not on 
the highness or lowness of prices, but on the relation 
between prices and money wages. The selling price of 
each commodity must be sufficiently above the amount 
paid out in wages in getting it produced, to give the 
employers and dealers a profit on their outlay. In- 
crease of currency raises prices, but in the long run it 
raises money wages in the same proportion. It therefore 
leaves the essential difficulties of the case unchanged. 

7. Notes Secured by Pledge of Property. — Another of 
the erroneous theories relating to inconvertible notes is 
that they cannot depreciate in value if they are secured 
by the pledge of property of some kind. It is a favorite 
notion with currency quacks that every man who owns 
land or other safe pro})erty, ought to be allowed to mort- 
gage it to the government and olitain the issue of legal- 
tender notes " based " upon this security. 



Notes " based " on Property. 191 

The fatal defect of such notes is that very few of the 
people who want money want land. Good and useful 
as land is, it cannot be moved from the place where it 
lies. Any man wishing to pay a debt in another country 
could not send land to pay it. If he took some of the 
land pledged for the notes, and sold it, he could get only 
notes based on other lands as payment, — which would 
not help him at all. 

Again, notes secured in this way would be liable 
to indefinite overissue and depreciation. We need in 
currency notes but a small proportion of the value of our 
land and other durable property. As soon as the due 
limit of issue was passed, a general rise of prices would 
set in, — lands rising in price as well as other things. 
By the time the issue had reached in amount the orig- 
inal valuation of the lands, these might have risen to 
five or ten times their original valuation. At this raised 
valuation each piece of land would become a perfectly 
good security for a fresh batch of notes. So it would 
go, until by repeated inflations, the value of the notes 
became zero. 

There is only one safe and useful form of circulating 
notes, namely those that are in the first place, readily 
convertible into coin from day to day at the option of 
each holder, and that are, in the second place, well 
secured against ultimate failure or neglect on the part 
of the issuer to keep faith with the public. Many 
other devices have been tried, but they have always 
resulted disastrously. 



192 Political Economy. 



QUESTIONS AND EXERCISES. 

1. How do changes in the value of money show themselves? 
Why are such changes important? How do changes of prices 
affect the production of gold? 

2. How does the supply of money differ from the supply of 
other things? Wherein is the demand for money peculiar? Dis- 
tinguish between the nominal and the real demand and supply. 

3. When a sum of money has been used in paying for goods at 
retail, what determines how soon it may be similarly used again? 

4. Show that the circulating period is not the same for all parts 
of the currency. 

5. Show that money performs two distinct functions in its 
circuit. 

6. Suppose two countries have the same quantity of currency, 
and the same amount of products to be exchanged, does it follow 
that their prices must be alike ? Does it follow that they need the 
same quantity of coin? of notes? 

7. What causes the appearance of general overi^roduction dur- 
ing periods of business depression? 

8. AVhat is meant by saying that excess of money looks like a 
deficiency of goods? 

9. How far, or in what respects, is the value of gold an excep- 
tion to the general laws of value? 

10. How is it shown that changes in the current production of 
gold have little effect on its value ? 

11. What are the comparative advantages of the two forms of 
bank currency? Show that the proportion of each is largely a 
matter of convenience and business habits? 

12. "What is the source of banking profits ? 

13. What limits the amount of bank currency in each country ? 
What, roughly, is the proportion of bank currency to coin in the 
United States ? Show that if all notes were abolished, the 
present volume of deposits could not be maintained. [Consider 
the increased demand for coin as pocket money.] 



Qtiestions and Exercises. 193 

14. What provisions are made for redeeming the notes of the 
National Banks ? Is there any security for the payment of their 
depositors ? 

15. How does it happen that the silver dollars are equal, in 
exchange value, to gold dollars, although the silver they contain 
is wurili only fifty and odd cents ? Do you think of any other 
cases of the same kind in our present currency ? 

16. How is it shown that the silver in the Treasury is not fill- 
ing the place of a true specie reserve for the silver certificates ? 

17. "Why is the double standard impossible in practice ? Illus- 
trate by sketching the history of the double standard in the United 
States. 

18. What are the advantages of using both gold and silver 
as money ? How can both be kept permanently in use in any 
country ? 

19. What causes the market value of gold to be slow in con- 
forming to its natural value? 

20. Why is it that gold has strictly no price? 

21. What is the weak point in the scheme known as Interna- 
tional Bimetallism? 

22. Explain the recent provisions of our laws respecting the pur- 
chase of silver by the Treasury. 

23. What are the characteristics of " Inconvertible Notes " as 
currency? How is the value of such notes fixed? What injus- 
tice arises from overissue of them? 

24. Does the copious issue of inconvertible notes make money 
plentiful and trade brisk? 

25. What is to be said regarding the use of inconvertible legal- 
tender notes secured by a pledge of property ? Could such notes 
depreciate in value? 



CHAPTER XVIII. 

WAGES AND PROFITS CONSIDERED AS PORTIONS OF THE 
PRODUCT OF INDUSTRY. 

1. Preliminary Explanations. — We now enter on a new 
luranch of our study. We have seen that productive in- 
dustry calls for two kinds of exertion or sacrifice, namely, 
labor and waiting. We have already noted some conse- 
quences of the fact that these two burdens are, in the 
main, borne by two distinct sets of men, known as labor- 
ers and employers. We must now inquire how, under 
this separation of burdens, the industrial rewards of the 
two sets are respectively determined. 

The pay of hired laborers we call wages. The term 
includes all payments for services of any kind ; but, for 
the sake of simplicity, we shall at first consider only the 
wages of productive laborers. 

Further, the term "wages" is to be understood in the 

strict sense. We have to do here with hired laborers 

only. The earnings of those productive laborers who 

work on their own account (c. y. small farmers) are not 

strictly wages. Such producers have their product, or 

the things received in exchange for it, as the reward 

of their labor and waiting. If all producers worked on 

this basis, we should have no need of a theory of wages. 
194 



Wages and Profits. 195 



The term " product of industry " is to be understood 
as referring only to the final product, — the finished or 
enjoyable commodities that are desired for their own 
sake. It does not include machinery, materials, or other 
things that are useful only as means towards producing 
enjoyable commodities. In other words, we are to re- 
gard industry from the standpoint of its ultimate aim. 
The labor spent in producing capital is to be regarded 
as labor spent in obtaining the enjoyable things that 
the capital helps to produce. Those things, not the 
capital itself, constitute the natural reward of such 
labor. (Chap. XI. § 3.) 

In our first study of wages and profits we shall con- 
sider wages in the mass, — the aggregate wages of the 
whole body of hired laborers. In the case of profits, also, 
we consider first the total gains of the whole body of 
employers. Individual wages and profits we shall discuss 
later. 

The whole product of industry completed from day to 
day belongs to the employers. Much the larger part of it 
simply replaces to them the wages paid out in getting 
it produced. The rest is their profit. 

Profits are not, like wages, the reward of a single kind 
of exertion or sacrifice. Employers could not be employ- 
ers without a large fund of savings wherewith to pay 
wages. The whole capital of the country, so far as it 
has been produced by hired labor, represents savings 
invested by the employers. . Profits are, in part, a reward 
for the self-denial involved in all this saving. But, 



196 Political Economy. 



secondly, employers are themselves productive laborers 
of a high order. Industry could not prosper without 
their services in planning and directing the work. Their 
profits reward also these personal labors on their part. 

How much of the whole mass of profits comes as a 
reward for the saving, and how much for the personal 
labors of the employers, cannot be discovered with pre- 
cision, because there is nothing in the result itself to 
show this. It is common, however, to give the name 
of Interest to the portion that rewards the saving, and to 
assume that the amount of it is shown by the current 
rate of interest on loans. The portion that rewards their 
personal labor may be called earnings of management, 
or personal earnings of employers.^ 

We make no account, for the present, of the fact that 
the natural advantages for carrying on each industry are 
rarely quite alike for all engaged in it. Inequalities of 
opportunity give rise to economic rent, which will form 
the subject of a later chapter. 

2. Wages as a Part of the Current Product of Industry. — 
Wages, as we all know, are customarily paid in money. 

1 The whole effort to draw an exact line between the two portions 
of profit is, in my opinion, entirely futile. If employers borrowed 
their whole investment from another set of men, there would be a 
basis for exact reckoning in tlie case. Since no man can be a true 
employer without some savings of his own, and since employers as 
a body borrow but a small part of the whole amount they invest, it 
would seem impossible to make a nice distinction between the two 
portions of their profit. It is like the attempt, sometimes made, to 
distinguish, in the products of industry, the portion due to capital 
from the portion due to labor. Production itself knows nothing of 
either distinction. 



Tlie Source of Wages. 197 

But money is no good in itself. The real wages of labor 
consists of the enjoyable commodities that are bought 
with the money. Changes of money wages are of no 
consequence except so far as they imply changes of real 
wages. The question of wages, then, is what determines 
the quantity of enjoyable commodities the laborers are 
able to obtain, week by week, in return for their labor ? 

Our starting point, in seeking the answer to this 
question, must be the fact already noticed, that the hired 
laborers own no part of the enjoyable products of labor 
awaiting purchasers As a rule, also, they have but 
little to offer for goods but their own labor. Only the 
more thrifty among them have saved anything. Some 
small amounts are ordinarily owing to them as wages; 
but if against the wages due we set off what they owe 
merchants and owners of houses, it is probable that the 
balance in their favor would be but small. 

This means that, for their services in producing the 
good things now awaiting purchasers, they have, as a 
class, been paid already. If, then, they are to receive 
any considerable part of these things, it must be for 
producing, or helping to produce, future commodities. 
Secondly, it must be by the voluntary action of those 
who own the existing supply of money and goods. 
Whatever these choose to consume of the good things 
already on hand, they have full power and legal right 
to consume. Only whatever they choose to spare from 
their own consumption, can be counted on for the la- 
borers. If they consume freely and save little, wages 



198 Political Economy. 

will 1)6 low ; if they consume little and save much, 
wages will be high. 

3. Wages and the Circulation of Money. — Wages being 
paid in money, the question how great a part of the 
current product of industry is to go to the laborers, is 
decided in practice by the use made of the money em- 
ployers receive for the things they sell. When a person 
sells anything, he may use the money received for it in 
buying commodities for his own consumption, or he may 
save it for use in business with a view to profit. If he 
use it in the first of these ways, clearly the commodities 
he buys are lost to wages : the laborers cannot also have 
them. 

If all who get any part of the money received for goods 
should suddenly abandon the habit of saving, and should 
use to the full extent their right of buying things for 
their own use, there would be nobody to hire laborers 
any more. Wages would disappear. The whole product 
of industry would be consumed by the capitalist class. 

If, on the other hand, it were possible that all the 
money received for goods should be devoted to hiring 
laborers, the whole product of industry would in that 
case go as wages. 

Between these two extremes, whatever proportion of 
the money received for goods at retail, is saved and 
applied to hiring laborers, that proportion of the total 
product of industry is thereby designated as wages of 
labor. So that the whole matter turns on the question 
of saving. 



Money Wages and Real Wages. 199 

The student will find it helpful, at this point, to recur 
to the diagram on page 134. The money returning to 
the point 1 through the bulbs, h, e, h, I, o, is the portion 
of the whole money-supply used in hiring laborers. What- 
ever proportion this bears to the whole stream of money 
passing the point 1, that proportion of the total product 
of industry goes to the laborers as wages. Not, however, 
it must be remembered, for producing these same com- 
modities, but for helping to produce other commodities 
that are yet in the future. 

The secondary bulbs, h', e', etc., remind us that money 
received as wages may be saved and become wages over 
again. The savings thus made from wages by skilled 
artisans, members of the learned professions, etc., consti- 
tute an important fraction of the whole mass saved year 
by year. Their primary effect on wages is to alter, not 
the total mass, but the apportionment of the total mass. 
The wages of the other laborers are greater by the 
amount that these laborers save. Of course, those who 
save have their income increased later by the amount 
their savings bring them. 

It is evident from these considerations that the sum 
of wages, in any community, must depend on two things : 
first the productiveness of the community's industry ; and 
secondly, the strength of the saving spirit among those 
members of it who have savable income. 

If the productiveness of industry be given and con- 
stant, the real wages of the laborers will depend on the 
second of the two factors ; that is to say, on the proper- 



200 Political j^conomy. 



tion the total spendings of the capitalist classes bear to 
their total savings, week by week. Or, stating the same 
principle in terms of our diagram, the quantity of com- 
modities going to the laborers will depend on the ratio 
the money passing through the wage-bulbs bears to the 
whole stream of money offering for goods at 1. For 
example, in the illustrative case given on page 136, if 
forty of the fifty millions constituting the weekly supply 
of money, pass through h, e, h, /, and o, then the laborers 
receive as wages four-fifths of the weekly product of 
industry. 

4. Savings not Governed by any Strict Rule. — Since 
wages depend thus directly on savings, the study of 
wages becomes primarily an inquiry into the practice of 
saving. If we could discover why just so much is saved, 
we should have solved the problem of wages. But here 
the real difficulties of the case begin. The question 
how the flow of savings has its limits fixed, from week 
to week, is far from simple. 

Many thousands of persons, in every civilized country, 
save more or less of their income. But the cases are 
probably rare in which two persons having the same 
income, save the same precise part of it. Even one and 
the same person saves a larger proportion of his income 
at one time than at another. Some save with a definite 
object in view, such as to provide for their children or 
for their own old age, or to carry out a specific object 
in business. Others save with only a general desire to 
grow richer, and still others because they have a greater 



Savings not Subject to Strict Utiles. 201 

income than they care to spend at the moment. It is 
very clear then that, as saving depends on the free choice 
of each individual who has income beyond his actual 
wants, there can be no formula or uniform rule as to 
savings. We cannot say, for example, that if the pro- 
duct of industry be increased by a given percentage, 
savings will be increased by the same percentage. Still 
less can it be assumed that, when the product is in- 
creased, the whole increase will be saved. We can only 
be sure that increase of product causes increase of sav- 
ings. As to the precise amount of increase, no two 
persons and no two communities would be likely to 
behave quite alike in a given case. 

5. General Truths Regarding Savings — Yet some gen- 
eral principles may be laid down in regard to the total 
savings of each community, and the fluctuations to which 
the total is liable. Some persons save, no doubt, merely 
in order to postpone the enjoyment of their income. 
They would save more or less even if thereby they could 
add to their wealth nothing beyond the amount actually 
saved. But the amount likely to be saved in that way 
would fall far short of meeting the needs of the laborers. 
Their readiness to work for less then their labor eventu- 
ally produces, gives a chance to make savings a source of 
income. Most of the savings made in a civilized country 
are made with a view to taking advantage of this oppor- 
tunity. Even those who would save something without 
this inducement, save more because of it. 

This being so, we can safely assume that the amount 



202 Political Economy. 



of savings likely to be made in any given community 
will depend largely on the rate of profit to be gained by 
the use of savings. An increase of profits would stimu- 
late those who save, to save more strenuously. A fall of 
profits, on the other hand, would tend to check their 
energy in saving. 

Again, it is evident that much depends on the character 
and temperament of those in each community who have 
savable income. If these be careless about the future, 
fond of lavish and costly enjoyments, their savings are 
likely to be meagre. Profits must be high in order to 
induce such men to save at all. On the other hand, 
where the richest members of the community are men 
of energetic spirit and simple tastes, little inclined to 
luxurious living and costly indulgences, a large proportion 
of their income is sure to be saved and applied to indus- 
trial enterprises. In such a community the rate of profits 
may be comparatively low without checking the fiow of 
savings. Wages, therefore, may be steadily high in com- 
parison with the productiveness of industry. 

6. Bearing of these Truths on Wages. — These general 
truths form the basis of our reasonings on the subject 
of wages. It is by means of them that we are enabled to 
explain the fundamental relation between the wages of 
hired laborers and the product of their labor. 

It follows from them that there is in every commu- 
nity, at any given time, a limit to the amount of savings 
that will be made for a given rate of profit. If, for any 
reason, profits should increase, savings may be expected 



Connection between Wages and Profits. 203 

to increase also; if profits decline, savings tend to fall 
off. Again, if the community should become more eager 
in the pursuit of riches, more ready to give up present 
enjoyment for the sake of future gain, savings may be 
expected to increase without the stimulus of higher 
profits. If the people should become less thrifty, less 
energetic in the struggle for wealth, savings would be- 
come less in amount even though profits should remain 
as high as before. 

The effect on wages of a change in the volume of 
savings is too obvious to need remark, seeing that sav- 
ings must become wages in order to gain a profit. But 
it is necessary to observe that changes of wages, the pro- 
ductiveness of industry remaining the same, are followed 
in turn by changes in the rate of profit. The profits of 
the employers in any given mass of product, consist of its 
excess over the wages paid out in getting it produced. 
The less the wages were the greater the profit is. If, 
therefore, wages should fall, the productiveness of indus- 
try being unchanged, profits must become greater than 
before. Unless those who have savable income have 
become less ready to save than formerly, this increase of 
profits must evoke increase of saving and restore wages 
to the former level. And similarly, if wages should rise 
without increase of product, the resulting decline of 
profits would check the flow of savings and thus cause 
wages to decline again, 

7. Normal Wages and Profits. — It follows that we have, 
in the case of wages and profits, much the same kind of 



204 Political Economy. 



adjusting process as takes place in settling the general 
level of prices. When, at any given level of wages, the 
corresponding rate of profit causes men to save more of 
their income than is needed to pay these wages, the gen- 
eral level of wages will tend to rise, and the general 
rate of profits tend to decline. On the other hand, when 
the rate of profit resulting from any given level of wages 
does not induce men to save enough to pay these wages, 
the general rate of wages will tend to fall and the rate 
of profits to rise. 

There is therefore for every community, at any given 
time, a normal level of v/ages and of profits, to which 
current (or market) wages and profits tend to conform. 
Wages are at their normal level when the correspond- 
ing rate of profit induces men to save enough, and only 
enough, to pay these wages. When wages are at the 
normal level, profits are at the normal rate. Normal 
wages and profits go together ; it is simply a case of 
equilibrium. 

The question whether normal wages shall be high 
or low in any community will depend, as already indi- 
cated, on two things: first, the productiveness of the com- 
munity's industry ; secondly, the strength of the saving 
spirit among those who own the products of its industry. 
Both of these factors are subject to change ; a change 
of either would bring a change in the normal level of 
wages. If, for example, the existing capital of the 
country should be inherited by a class of men much 
less inclined to save than the present owners of it, the 



Normal Wages and Profits. 205 

normal level of wages would inevitably decline. Again, 
if the laborers should become more diligent, more ener- 
getic, and more anxious to make the product of industry 
as great as possible, normal wages would rise ; for in- 
crease of product is sure to evoke increased savings. 

The normal level of profits depends primarily on the 
character of those who have savable income. But it 
also depends somewhat on the amount of income there 
is which may be easily spared. The larger the fixed 
capital of a country is in proportion to its population, 
the lower is its normal rate of profits likely to be. For 
the greater its fixed capital, the greater, at any given 
rate, will the total mass of profits be, — the greater, that 
is to say, will the total income of its capitalists be. 

Now it is much easier to save out of a large income 
than out of a small one. A man who has a very large 
income can hardly spend more than a fraction of it on 
himself without a ridiculous and offensive display of his 
wealth. Great incomes are therefore distinctly favorable 
to great savings. Even though the rate of profits should 
be declining, the men whose profits are reckoned on 
millions of dollars' worth of capital, can easily save 
enough every year to add greatly to their wealth. Such 
men have no further need of saving; but they seem to 
save as eagerly for the mere delight of carrying out 
great industrial enterprises, as other men do under the 
spur of actual need. Some of them, we may hope, are 
also stimulated by the desire to benefit their fellow-men 
by the intelligent use of their wealth. 



206 Political Economy. 



The normal rate of profits tends, therefore, to declme 
as a country grows in fixed capital, especially where this 
becomes concentrated in the hands of a few men of great 
industrial ambition. The benefit accrues to the laborers. 

8. Wages Influenced by Past Savings. — While wages, 
at any given time, depend directly on contemporary sav- 
ings, it is easy to see that they are also greatly influenced 
by past savings. We have just seen that a high propor- 
tion of fixed capital to population is favorable to high 
wages, by reason of its tendency to lower the normal or 
necessary rate of profits. 

But there is a much more important sense in which 
such capital affects wages. It adds enormously to the 
productiveness of industry. It has therefore a double 
tendency to raise wages : first, by increasing the yield of 
labor, and secondly, by causing a higher proportion of 
the total yield to be used as wages. 

Now the fixed capital of the present time is mainly 
a result of the savings of past years. The general body 
of laborers would probably never have been willing to 
work for a return so distant as such capital offers. Men 
who have always spent as rapidly as they have earned, 
would scarcely have faced the long waiting for reward 
that is necessary in opening mines, preparing land for 
tillage, constructing factories, warehouses, ships, rail- 
ways, etc. Nothing but the offer of wages could have 
induced most of them to take part in such undertakings. 

The great industrial improvements of past years were 
therefore made possible by the foresight and self-denial 



Influence of Past Savings on Wages. 207 

of those who supplied the savings necessary to pay the 
laborers for making them. The great addition these 
improvements have made to the product of present in- 
dustry goes mainly to the laborers. Their first effect, 
no doubt, was to increase the gains of the employers ; 
but the higher profit so gained led to a rapid increase of 
savings and consequent increase of the total volume 
of wages. 

We see, then, that in any country where the spirit 
of saving is strong, and has been strong for several 
generations, two important consequences result from it 
for the present volume of wages. In the first place, 
the labor of the country is used in the ways that afford 
the largest returns ; every known device for adding 
to its productiveness at the cost of longer waiting, is 
utilized to the fullest extent. In the second place, the 
stronger the spirit of saving at the present time, the 
greater is the proportion of this enlarged product going 
to form the wages of hired laborers. 

The effect of sustained saving on the general wealth 
of a community is too obvious to need extended com- 
ment. Saving is, in more ways than one, the mother of 
riches. The countries that have been notable for the 
saving spirit of their people are now the wealthy coun- 
tries of the world. Eeadiness to save usually goes, no 
doubt, with a readiness to exert one's self in other ways. 
The countries where savings are large are generally 
countries where the people are industrious as well as 
thrifty. But savings are necessary in order that labor 
may be used effectively. 



208 Political Economy. 



Without both industry and thrift a community remains 
poor, even though surrounded by overflowing natural 
wealth. On the other hand, dilligence and economy 
create riches even in the face of great obstacles. New 
P2ngland has but few natural advantages for production. 
The materials for its industries, and the food for its in- 
habitants, have very largely to be brought in from other 
places. But, in spite of these disadvantages, the accumvi- 
lated wealth of its people is greater than that of many 
highly-favored countries : and there are few places where 
the wages of labor are so high. It is a striking illustra- 
tion of the power of sustained saving, coupled with the 
industrious spirit. 

9. The Rate of Profits hard to Discover in Practice. — 
The relation of profits to wages is simple enough as a 
matter of theory. We say that the amount of profit con- 
tained in the product of industry completed each day or 
each week, is the excess of the product over the wages 
paid out in getting it made. The wages {i. e. the real 
wages) consisted of a certain mass of food, clothing, and 
other commodities.^ The product consists of a certain 
greater mass of similar commodities produced in return 
for the wages. The difi'erence between the two must 
therefore be profit for the employers. 

This is quite true, and it is highly important to 
see quite clearly that this excess of product over the 
real wages paid in producing it is the only source of real 

1 These constitute the real cost to the employers of the things 
produced by hired labor. 



The Rate of Profit hard to Discover. 209 

profit in business. Yet a little reflection shows us that 
it would be very hard to discover with exactness how 
great a part of each week's product is profit, and how 
much is merely replacement of the savings expended 
in getting it produced. 

The wages paid out by the employers, first and last, 
in the production of the commodities completed in any 
given week, were not paid out in any one previous week. 
The expenditure was, in fact, spread over months and 
even years. It was so intimately blended, at many 
points, with the cost of the products of other weeks 
that no exact separation is possible. 

That large part of the employers' cost which con- 
sisted of wages paid for clearing land, opening mines, 
constructing and repairing buildings, machinery, rail- 
ways, etc., — in a word, the whole industrial plant of the 
country, cannot be accurately apportioned to any given 
mass of finished products. Savings expended for the 
more durable forms of capital are replaced, not in a 
lump sum, but by a series or stream of small instalments 
running as long as the capital lasts. 

Now the employers can seldom foretell with accuracy 
how long each part of their productive apparatus is going 
to last, or what repairs it will need. Any portion of it 
may wear out sooner, or may last longer, than they can 
now foresee. Every part of it is liable to be superseded 
and made valueless at any time, by the invention of 
better devices or methods. They cannot tell how much 
more their existing apparatus will eventually yield. 



210 Political Economy. 



They therefore cannot tell with precision how much of 
the original labor of making it is chargeable to a given 
mass of product. It follows that they cannot say with 
accuracy how much of each week's product of industry 
is to be set down as replacement of the wages spent in 
obtaining it. And if they cannot tell exactly how much 
it has cost them, of course they cannot tell exactly how 
much their profit is. 

The difficulty of ascertaining the exact proportion 
of profits, in any given mass of completed product, is no 
reason for doubting whether there be an exact relation 
between wages and profits. The trouble arises in dealing 
with limited portions of the product arising from each 
investment of savings. The account cannot be closed 
and the balance struck until the investment itself has 
yielded its whole return. Since, in the long run, nearly 
all forms of capital do yield their final return, the pro- 
portion of profit in each week's product does eventually 
disclose itself with almost scientific accuracy. 

Of course every business man keeps accounts, which 
are supposed to show how much profit he is making. 
But the result is only approximate. The reckoning of 
his profits for any period is based, in large part, on the 
estimated value of his buildings, machinery, stock, etc., as 
they stand at the beginning and again at the end of the 
period. This may answer well enough for practical pur- 
poses ; but it is only an estimate. It may later prove to 
have been based on much too high or too low an opinion 
of the productive power still left in the fixed capital. 



Wages and Profits not Distinct "Shares." 211 

10. Wages not Found by Deducting Profits. — It is 

obvious, from the facts of the case, how great an error 
is made by those who assume that wages and profits, as 
parts of the product of industry, are exclusive of each 
other, and that if the profits be deducted, the residue 
will be the portion going to the laborers as wages. 

Considered as contemporary portions of the product of 
industry, wages and profits are not at all complements 
of each other. They arise from radically different ways 
of dividing the product. 

If from the whole product you take away the part 
that is profit, the remainder is not wages but replace- 
ment of the past savings expended in getting the product 
made. The complement of your profit is the outlay made 
in order to gain the profit. 

On the other hand, if you take away the part that is 
to go as wages, the remainder is not profit, but that por- 
tion of . the product which the capitalist class are to con- 
sume in their own enjoyment. The complement of what 
is saved is what is spent. 

The portion wages may therefore overlap the portion 
profit to an indefinite extent. It does in fact overlap it, 
whenever a capitalist saves any part of his profit. The 
sum of wages and profits in any given product may 
therefore greatly exceed the product. It follows that 
wages cannot be discovered by deducting profits from 
the product. 



CHAPTER XIX. 

WAGES OF INDIVIDUAL LABORERS. 

1. Factors on which Market Wages Depend. — Since 
the whole volume of savings is shared among the pro- 
ductive laborers who work for hire, it is clear that each 
man's share depends on two factors : first, the amount 
of savings to be invested, and secondly, the number of 
laborers to be hired. Any change in either of these 
factors, without a corresponding change in the other, 
must raise or lower the <];eneral level of individual wacres. 
If the number of laborers be increased, or the flow of 
savings grow less, wages must tend to fall. If the 
number of laborers grow less, or the flow of savings 
increase, wages must tend to rise. 

When the number of laborers in a country is in- 
creased, the new-comers begin at once to share in the 
savings offering for labor, but they do not at once add 
correspondingly to the means of saving. This lies in 
the nature of production, so long a time being necessary 
for producing most of the commodities of which real 
wages consist. 

The case is obscured, in practice, by the mingling of 
the new laborers with the old. If the new laborers 
were set at work separately, without disturbing in any 
212 



Changes of Market Wages. 213 

way the course of industry among the others, then it 
would be clear that the first use of their labor must 
be, not to add to the food, clothing, and other commodi- 
ties available for paying their wages, but to provide the 
tliree forms of additional capital necessary for enabling 
them to produce such commodities. 

The mixing up of the new laborers with the old can- 
not alter this essential feature of the case, though it 
greatly complicates the study of it. We may be sure 
that it is still true that the presence of the new labor- 
ers involves, as its first effect, the production of in- 
creased capital rather than the production of increased 
commodities. The product of industry cannot be in- 
creased in less time than commodities can be produced; 
the increase must be built up from the foundations. It 
is therefore a necessity of the case that a considerable 
period must elapse before the new laborers can add their 
full quota to the enjoyable products of industry. 

In the meantime, whatever they receive as wages 
must be drawn from the products of other labor, and 
must be, at least in part, taken from savings that would 
otherwise have gone to the original laborers. I say "in 
part," because the general fall of wages resulting from 
the increase of laborers seeking employment, would open 
a prospect of higher profits from the investment of sav- 
ings. This would probably give rise to more strenuous 
saving on the part of those having spare income, and 
would thus increase the volume of savings, even before 
the new laborers began to add appreciably to the stream 



214 Political Economy. 



of enjoyable commodities available for use in paying 
wages. The consequence would be that wages would 
not fall in as great a ratio as the number of laborers 
had been increased. 

In the converse case of a sudden decrease of laborers, 
wages Would rise, but not necessarily in the same ratio 
as the laborers are diminished. The flow of savings 
seeking investment may be checked because of the les- 
sened chance for making profits. Again the temporary 
check of investment during periods of business depres- 
sion, implies diminished earnings for the laborers as a 
body. On the other hand, when business revives again, 
wages may rise for a time above their ordinary level : 
the amounts held back from investment during the de- 
pression are then brought forward to be offered for 
labor, in addition to the current savings of the time 
itself. These are obviously not exceptions to the prin- 
ciple that wages depend on the ratio of savings to the 
number of laborers. They are rather illustrations of its 
working under changing conditions. No circumstance 
can affect the rate of wages in a community except by 
first altering this ratio. 

2. Classes of Laboiers. — The general rule of market 
wages just given for the general mass of laborers, holds 
true also for the members of each group or class into 
which the whole body is divided. The rate of pay for 
each kind of labor depends on the demand for it as 
compared with the supply. If the number offering any 
kind of labor increase, without increase in the amount of 



How Competition affects Wages. 215 

savings offered for that kind of labor, the rate of pay for 
it falls ; and vice versa. This fall (or rise) in the wages 
of particular classes or groups of laborers may take place 
without disturbing the general level of wages. 

Probably we should all agree that the fair rule of 
relative wages would be to make the wages of each 
occupation proportional to the quantity of labor and 
other sacrifice it involves.^ There is, however, no stand- 
ard for measuring the quantity of labor and other sacri- 
fice involved in each occupation, except the one afforded 
by the conduct of the laborers themselves in choosing 
occupations. This brings us to the fundamental prin- 
ciple governing differences of wages in different occupa- 
tions, namely, the greater or less activity of free com- 
petition. 

If every laborer, in choosing his occupation, were able 
to choose it freely, with sole reference to his own inter- 
est and desire, differences of wages could not be perma- 
nent, except where they correspond to real differences in 
the character of occupations. For we may safely assume 
that laborers have at least the wish to do the best they 
can for themselves ; that, therefore, if they had full free- 
dom of choice, they would ordinarily choose the occupa- 
tions that seemed to offer highest wages in comparison 
with the whole sacrifice demanded. This would be the 
state of things known as freedom of competition. 

3. Erroneous View of Competition. — It is a common 

1 The student must bear in mind the meaning of " quantity of 
labor." See Chap. XI. 



216 Political Economy. 

error to regard competition as a force wliicli tends to 
depress all wages, profits, and prices, and in fact every- 
thing that comes under its influence. 

If competition had the tendency this view attributes 
to it, then clearly wages, profits, and prices must long 
since have been reduced to zero, for competition has 
always been more or less active among men. This 
consideration alone ought to be enough to show how 
mistaken the view is. 

The mistake arises from looking only at one side of 
the case. Competition has no power either to raise 
or to depress all wages, or all profits, or all prices. In 
the case of prices we have already seen that its sole 
tendency is to establish uniformity, to prevent one pro- 
ducer from getting a higher price, or from having to 
put up with a lower price, than other producers are 
getting for the same article. How high or low all 
prices of commodities shall be depends on the demand 
and supply of money, — a matter over which competition 
lias no control. 

Similarly in the case of wages, competition has noth- 
ing to do with fixing the general level. It simply tends 
to remove inequalities that do not rest on differences 
in the labor performed. In a state of full competition, 
laborers would avoid employments in which wages hap- 
pened to be low in proportion to the labor exacted, and 
would choose those in which the wages were high. This 
action on their part would cause wages to rise in the 
one set of employments, and to fall in the other set, 



Competition onhj a Leveller. 217 



until a condition of equality were reached. The same 
principle would apply to the case of employers offering 
different rates of pay for the same or similar kinds of 
labor; no one employer could obtain laborers except 
on the condition of paying them as high wages as any 
other employer was ready to pay them. 

Competition tends, no doubt, to lower wages wherever 
they are above the common level ; but it equally tends 
to raise wages wherever they are below the common 
level. It is simply the principle of each man's doing 
the best he can for himself by all fair and honorable 
means. The laborer acts in free competition when he 
goes where he can get highest wages. The employer 
does the same when he gets all the labor he can for 
his savings. The tendency of both efforts, taken to- 
gether, is not to raise or lower all wages, but to create 
uniformity in wages. 

Freedom of competition surely destroys nothing. All 
that men produce they have as the reward of their labor 
and waiting, — competition or no competition. All that 
the saving classes save, the hired classes receive as 
wages, whether with or without competition. This is 
all they can in any case receive ; freedom of competi- 
tion affects only the mode of sharing it among them. 

4. Temporary Obstructions to Competition. — Under 
division of labor, the wages and profits of each industry 
depend on the value of the product. When the market 
value of the product rises above its natural value, the 
first effect is to raise the profits of the employers. Under 



218 Political Economy. 



the stimulus of the higher profit, additional savings are 
attracted into the business, and the increased demand 
for laborers qualified to produce the commodity causes 
their wages to rise. 

In the same way, when the market value of a com- 
modity falls below its natural value, the first effect is 
a fall of profits for the employers who produce it. But 
the fall of profits causes less savings to be invested in 
producing the commodity. As a result, the wages of 
the laborers in the industry fall.^ 

Now if laborers could change their occupations quickly, 
these changes of wages would be slight and of short dura- 
tion. But here we come on one of the many obstructions 
to perfect freedom of competition. Changes of employ- 
ment are not easily made. Every occupation, above the 
very rudest and most elementary, requires some degree 
of training and special knowledge. A change means 
forfeiture of the skill already acquired, and loss of time 
in learning a new kind of work.^ 

Eather than incur the loss and trouble of changing, 
men usually persevere in their old calling, even under 

1 To the extent of the difference between producing at high pressure 
and producing at low pressure, the change of demand for labor in any 
industry may take place at once. In the industries using a great deal 
of fixed capital, the change cannot well exceed these limits in any 
brief space. Even this, however, is enough to make a serious differ- 
ence for the laborers. 

2 The concentration of single industries in particular towns in- 
creases greatly the difficulty of clianging employments. Laborers 
who would change must move to another town in addition to making 
the sacrifice spoken of in the text. 



Obstacles to Free Competition. 219 

reduced wages. In tlie main, the re-adjustment of wages 
has to be brought about through the choice of occu- 
pations made by the new laborers who are constantly 
coming forward. These can mostly be counted on to 
choose, among the industries open to them, those that 
offer best wages. By their action it is that the supply 
of labor in each industry is eventually adjusted to the 
demand, and wages are made to have, or tend to have, 
only such differences as correspond to permanent differ- 
ences in the quantity of labor involved. 

We thus see that competition among the laborers acts 
somewhat slowly ; also that the length of time necessary 
for bringing the market value of each commodity into 
agreement with its natural value, is the length of time 
necessary for bringing the market wages of its producers 
to the level of other wages. 

5. Permanent Obstacles to Free Competition. — Freedom 
of competition implies that the choice of occupations 
shall be made without constraint or compulsion. It is 
not indeed necessary that this shall be so in every case, 
since all occupations must have some recruits. If, when 
any industry happened to have a comparative deficiency 
of laborers, a sufficient number could come into it to 
restore the equilibrium, that would be enough to keep 
all wages under the equalizing influence of competition. 

We know, however, that even this condition is not 
fulfilled in practice. The range of free competition is 
limited and checked by a great variety of circumstances. 
These may be classified, in the main, under three heads : 



220 Political Economy. 



First, those that are local in their nature. Here the 
obstacle to competition is distance, with all that this 
implies: cost of travelling, the trouble of finding employ- 
ment among strangers, reluctance to leave home and 
friends, etc. These local impediments are greatly inten- 
sified by the differences of climate, language, and religion 
which prevail in the world. The contrasts of wages be- 
tween countries are very striking. In Japan, for exam- 
ple, wages are hardly one-fourth as high as in the United 
States. Even in Europe, they are not much more than 
half as high as in our country. If it were a simple 
and easy matter for laborers to move from one coun- 
try to another, these wide contrasts in wages could not 
last. 

In the second place, there are obstacles to free com- 
petition growing out of the need of much longer training 
for some employments than for others. This point has 
already been spoken of in connection with the value of 
products of skilled labor (Chap. XII., § 3). The princi- 
ple is, however, of much wider application than could 
be shown in connection with value. A considerable pro- 
portion of the occupations demanding long preparation 
have no specific products, being connected with trans- 
portation, exchange, banking, the learned professions, etc. 
Further, there is, strictly, no commodity wholly produced 
by skilled labor, nor is there any wholly produced with- 
out it. The so-called products of skilled labor are merely 
those into the production of which such labor enters 
most largely. Even if skilled labor entered equally into 



Inequalities of Wages. 221 



all production, in which case it would have no effect on 
values, the scarcity of it would still cause its remu- 
neration to be high. It is scarce only because the cost of 
long training acts as a permanent barrier to freedom 
of competition. 

Thirdly, many obstacles to free competition arise from 
the fact that many occupations call for natural gifts of 
mind or body that the great mass do not possess. Any 
employment that requires native intelligence, quickness 
of discernment, artistic instinct, clear judgment, the fac- 
ulty of organizing and commanding, or any other special 
faculty, is thereby closed to the great majority of men. 
Even those employments which simply require muscular 
strength are thereby closed to more than one-half of the 
whole community. 

Commonly enough, obstacles of this third kind are 
in addition to the need of long training and education. 
In the higher employments, or " professions," this is 
uniformly the case. 

6. Permanent Inequalities in Wages. — It would be 
impossible, in this little book, to go into all the details 
of differences in wages arising from these impediments to 
freedom of competition. The general principle govern- 
ing them is clear. At the bottom of the scale we find 
the great body of common or "unskilled" laborers; farm- 
hands, lumbermen, teamsters, miners, firemen, navvies, 
hodmen, sailors, fishermen, etc. Between these employ- 
ments, in any given region, there is fairly complete free- 
dom of competition, so that the permanent differences 



222 Political Economy. 



of wages from one to the other depend on the greater 
or less, attractiveness of each em})loyment. Comparing 
different countries, however, there are considerable con- 
trasts owing to absence of free competition. 

At the other end of the scale, we find those whose 
occupations require special gifts and costly training: 
superintendents, hired managers, architects, bank cash- 
iers, lawyers, doctors, etc. Wages in these occupations 
vary greatly from personal causes ; but they are ordi- 
naril}" many times higher than those of the unskilled 
mass. 

Between these extremes there are many gradations of 
wages, depending in each case on the greater or less 
potency of the obstacles to freedom of competition. 
Thus, next above the common laborers come the arti- 
sans or mechanics, — the men wdio have to learn a trade. 
Next above mechanics, those who, in addition to ac- 
quiring a particular kind of skill, must also have a 
good degree of education and general intelligence : en- 
gravers, modellers, engineers, chemists, teachers, proof- 
readers, etc. 

No rigid classification of occupations by earnings is 
possible. Wages in each trade vary widely on personal 
grounds. Energy, integrity, diligence, and special apti- 
tude for the work are pretty sure to raise the possessor 
above the general level of his calling. The opposite 
qualities are pretty sure to have the reverse effect. A 
good teamster may earn more than a poor tailor, — -a 
skilled engraver more than an indifferent lawyer, and 



Inequalities of Wages. 223 

so on. In general, the higher the occupation the wider 
this^ range of difference in earnings.^ 

Of course a certain proportion of each kind of labor 
is needed in a country: the precise amount depending 
on the nature of its industries. The source of the chief 
permanent inequalities of wages for different kinds of 
labor is the fact that the laborers sag heavily toward 
those employments that make least call for intelligence, 
education, and skill. In proportion to the demand there 
is always a vastly greater supply offering of unskilled 
labor than of skilled. 

7, Wages of Women. — The low wages of women 
afford a good illustration, though a lamentable one, of 
the principle controlling differences of wages. The num- 
ber of women who need to work for wages is fortunately 
much smaller than the number of men. But their lack 
of physical strength bars them out from all but a few 
productive employments. The conventional standards of 
feminine modesty limit still further the range of occu- 
pations open to them. The result is that, in the com- 
paratively small number of employments to which they 
have access, there is a constant oversupply of their labor 
in comparison with the demand. Consequently, women's 
wages are much lower than men's ; and there is no 
remedy for the inequality except in either lessening the 

1 It is one of the least hopeful features of the liibor organizations 
that they seem to aim at a dead level of wages for all who happen to 
be doing the same kind of work. Nothing could be more fatal to the 
industrial success of a community than the adoption of that principle. 



224 Political Economy. 

number of women who work for wages, or in extending 
the range of employments open to them. Fortunately, 
a movement in the latter direction seems to be going on 
in all civilized countries. 

It is easy, in cases of this kind, to mistake the true 
nature of the difficulty, and to blame the " hard-heart- 
edness of employers " for evils which employers are 
powerless to prevent. Business men could hardly be 
expected to employ any class of laborers at a loss. The 
wages they can afford to pay to women, in productive 
occupations, are limited by the low exchange value of 
the product. The low value of the products of female 
labor is due to the excessive supply of them, in com- 
parison with other commodities ; and this, in its turn, is 
due to the fact that women crowd into a few occupa- 
tions. 

If the community could be induced to pay higher 
prices for the commodities produced by female labor, 
and to buy, at the advance, the whole supply offered, 
wages of women would soon rise. Till the employers 
can get higher prices it is foolish to reproach them for 
the low wages. 

8. Normal Wages of Individual Laborers. — It follows 
from the principles stated in this and the preceding 
chapter, that there is, in any given industrial situation, 
a normal rate of wages for each kind of labor. This 
rate holds to the market rate much the same sort of 
relation that natural value holds to market value. It 
is the rate that, with a normal volume of savings, would 



Normal Wages for each Kind of Lahor. 225 

cause the supply of each kind of labor to be equal to 
the demand. Differences of wages are not normal when 
they tend to a shifting of laborers from one industry to 
another. 

When anything occurs to raise the market wages of 
laborers in general, above the normal rate, saving is 
checked and wages fall. When wages are, for any 
reason, below the normal level, saving is stimulated 
by the high rate of profits, and wages rise. 

When wages in any occupation are above the normal 
relation to other wages, an increased proportion of labor- 
ers are attracted into it, in preference to other occupa- 
tions of similar grade, and wages in the employment 
are brought down. In the reverse case, laborers seek 
other occupations by preference, and wages in the given 
employment rise. 

In order to save space, I shall assume that the reader 
can see for himself the truth of the following proposi- 
tions regarding the normal level of individual wages: 

First, that it is high in communities where the spirit 
of saving is strong, and where the product of industry 
is large in proportion to the number of laborers. If 
the spirit of saving be weak, or if the product be rela- 
tively small, the normal level of wages will be low. 
Two communities equal in producing capacity may have 
unequal wages. Again normal wages may be equal in 
two communities, notwithstanding a considerable differ- 
ence in the productiveness of labor. 

Secondly, the normal rate of wages for any particular 



226 Political Economy. 

kind of labor, is above the common level it the general 
mass of laborers be hmclered in any way from perform- 
ing that kind of labor. The greater the obstacles, the 
greater the inequality in wages. Conversely, if the rate 
of wages in any employment be permanently above the 
common level, it is so only because the general mass of 
laborers are hindered from entering the employment. 

Thirdly, so far as freedom of competition prevails 
between employments, differences in normal wages de- 
pend on differences in the character of the employments, 
as viewed by the laborers. 

Fourthly, the narrower the range of employments open 
to any class of laborers, the lower their normal wages 
will be. Conversely, a normal rate of wages below the 
common level can exist only for laborers whose range 
of competition is restricted. 

Fifthly, a rapid increase of laborers in any country 
tends to depress the general level of wages. It keeps 
the number of laborers always larger in proportion to 
the total volume of savings than it would be if the 
increase were less rapid.^ 

9. Wages of Non-productive Laborers. — It is necessary, 
before leaving the oubject of wages, to consider briefly 
the wages of non-productive laborers. The services of 
these laborers are sought, not with a view to profit, but 
for the sake of the comfort, improvement, or other bene- 
fits they confer on us. Their wages are therefore drawn, 

1 There is another highly important consequence of increasing 
numbers, which will appear in connection with economic rent. 



Wages of Non-productive Laborers. 227 

not from the savings, but from the spendmgs of the com- 
munity. This is a higlily important fact in relation to 
the general level of wages. It means that the fund for 
paying wages is larger than we have hitherto assumed. 
Not, however, larger by the full amount paid for non- 
productive services ; for it is to be observed that these 
services are in part paid for by the productive laborers. 
Teachers, ministers of religion, physicians, and public 
servants in general are in part supported by the con- 
tributions of those who live by wages. But the wealthy 
classes use non-productive services much more freely 
than the wage-earners. They spend much in the hire of 
household servants, footmen, coachmen, companions, etc. 
Whatever amount the laboring class receive in these 
ways is a clear addition to the wages paid from savings. 
Or, looking at the case from another point of view, we 
can easily see that the demand for these non-productive 
services keeps a considerable number of laborers out of 
the competition for savings, and thereby enables the pro- 
ductive laborers to get higher wages than they could get 
if the whole body of laborers were thrown for employ- 
ment on the savings offered for profitable investment. 

Yet it is clear that, in a very important sense, payments 
for non-productive services are not so beneficial to the 
laborers as the offer of savings would be. It is only 
better for them that the wealthy classes, if they are 
to spend instead of saving, should spend in hiring ser- 
vices rather than in buying luxurious commodities. 
What is spent in commodities is entirely lost to the 



228 Political Economy. 

laborers. What is spent in hiring services the laborers 
get, so to say, a single use of, and then it is gone. The 
kind of labor they give in return leaves no product to be 
used in paying them for furtlier labors. If the amount 
were saved and used in hiring them to produce useful 
commodities, the product of industry would presently 
be increased, and the wages of laborers would be raised. 
This on the hypothesis that those who have dispensed 
with personal services, persevere in the saving they 
have begun. Of course if they should turn out to be 
merely changing the form of their spending: if they or 
other wealthy persons should increase their consump- 
tion of good things to the extent of taking up all that 
the new producers add to the product of industry, wages 
would not be raised as a result of the change. 

Or, putting the same case in a different way, body 
servants, footmen, etc., live on the products of other 
men's labor. If, for the wages they are receiving, they 
were set at work as productive laborers, they would 
presently add to the product of industry enough com- 
modities for their own support, with a surplus over as 
profit for their employers. What they now consume, 
as non-productive members of the community, would in 
that case, go to swell the wages of other laborers, — 
provided, of course, that the change denotes a real 
increase of the saving spirit in the community. 

If all non-productive laborers were simply discharged, 
their present employers spending in increased purchases 
of commodities what they now pay for non-productive 



Wages of Non-productive Zahorers. 229 



services, there would be a serious fall of wages. The 
number of laborers thrown on savings for their wages 
would be increased without a corresponding increase of 
savings. The case would be similar in its effects to the 
increase of laborers spoken of in the first section of this 
chapter. 

10. Checks on Competition in Non-productive Occupa- 
tions. — Wages of non-productive labor tend to conform 
in a general way to those of productive labor, quantity 
for quantity, so far as competition prevails between the 
two.^ Between thclower forms of the one and the lower 
forms of the other, there is, so far as the laborers are con- 
cerned, a basis for freedom of competition; also between 
the higher grades of the two. The most important limi- 
tation on freedom of competition exists on the side of the 
employers. In hiring non-productive laborers, the em- 
ployer is not aiming at profit, and does not therefore feel 
so strongly the need of proceeding on strictly " business " 
principles. He is spending, and in spending it is not 
dignified to higgle over trifles. 

Further, the employer of non-productive laborers has 

them much of the time about him. His personal com- 

1 Remember, once more, that in measuring quantities of labor we 
must take tlie judgment of tlie laborers ; and that their judgment has 
reference to the whole sacrifice. For example, non-productive services 
are, for the most part, lighter in the mere physical exertion they call 
for than prodiictive labor is. But the household servant has less 
personal freedom than the productive laborer; and this difference 
causes household service to be regarded by the laborers as less digni- 
fied than productive labor. It is an element in their judgment as to 
the quantity of labor involved in either occupation. 



230 Political Economy. 



fort and convenience require that their service shall be 
cheerful and willing. This it could hardly be if they 
felt that their services were poorly paid. 

For these reasons, wages of household servants are 
liigher than they would be if fully controlled by compe- 
tition. It is not open to the general mass of other labor- 
ers to come in and do the same service for lower wages. 
The masters and mistresses do not give them the chance. 
The difference in wages, however, is not very great. 

Again, no man drives a hard barcjain with his doctor 
when he needs medical aid ; or with his lawyer when he 
gets into a lawsuit. The services which professional men 
render are so important that we feel the necessity of 
getting the very best help they can give us. The pay 
of this class of laborers is therefore not wholly under 
the control of competition. 



CHAPTER XX. 

FURTHER CONSIDERATIONS REGARDING WAGES. 

1. Combinations to Fix Wages. — No discussion of 
wages can be regarded as complete which fails to notice 
the strong tendency towards organization that exists 
among the hired laborers of our time. The tendency 
is not new, but in recent times the efforts at organiza- 
tion have become more extended than formerly. 

The labor unions have more than one object. Largely 
they are associations for benevolent purposes, for assist- 
ing members who are out of employment, for relieving 
families that are left destitute, etc. Much good has 
been accomplished by them in these ways. 

Commonly, however, the associations have shown a 
tendency to intervene in questions of wages. The mem- 
bers seem to believe that, by acting as a body, the labor- 
ers may force the employers to pay higher wages than 
they would pay if left to themselves. 

The question is one of great practical interest both to 
laborers and employers. It is at the same time, I think, 
a much broader and deeper question than the leaders of 
the labor unions suppose. A full discussion of it would 
require much space, since it touches, in one way or an- 

231 



232 Political lEconomy. 

other, almost every principle of political economy. Only 
the chief points can be touched on here. 

The most general form of the question is whether, by 
a general combination, able at will to order a universal 
strike, the hired laborers of the country could succeed 
in raising the general level of wages. Political econo- 
mists hold that they could not; the labor agitators seem 
to hold that they could. 

2. Strikes Tend to Discourage Saving. — The general 
grounds of the answer given by the economists can be 
stated very briefly. It is easily demonstrable that the 
wages of productive laborers are drawn from savings, 
and that the total volume of wages can be increased 
only l)y increase of savings. Now, saving is a voluntary 
act; it is for the most part an act of present self-denial, 
or sacrifice, submitted to for the sake of the future gain 
it will bring. Other things being equal, the greater the 
prospect of gain, the greater the volume of savings will 
be. We may safely assume, in any given case, that the 
total volume of savings is already as great as the com- 
munity is willing to make it for the existing induce- 
ment. Normal wages are therefore as high already as 
the situation will bear. 

A general strike might succeed in getting temporary 
increase of pay for some laborers. The trouble would 
be to find employment for all at the advance. Wages 
could be raised at any time, even without a strike, by 
inducing a portion of the laborers to withdraw from 
work ; but the rise could be maintained only by their 



Effects of Strikes. 233 

staying out. The whole body of laborers would not be 
benefited by such a rise of wages. 

A higher level of wages could be maintained only 
by an increased flow of savings. But if wages should 
be raised, profits would be lowered ; the inducement to 
save would be less, not greater, than before ; savings 
would therefore fall off instead of increasing. 

The conclusion seems unavoidable that even a uni- 
versal strike for higher wages must fail of success. It 
would fail just as an attempt to raise all prices of goods, 
without an increased supply of money, would fail. There 
would not be a sufficient supply of savings forthcoming 
to make the increased wages possible. The doctrine of 
the labor unions requires us to believe that men would 
save more for a less inducement than for a greater. It is 
therefore contrary to the fundamental principle of wages. 

The only way by which the laborers can make sure 
of raising their wages is clearly by adding all they can to 
the productiveness of their labor. By greater diligence, 
better care of machinery and materials, more disposition 
to turn everything to the best account for their employ- 
ers, they would increase very much the value of their 
services; the product of industry would become greater; 
both the means of saving and the inducement to save 
would be increased. That the speedy result would be 
an increased demand for labor and a general rise of wages, 
does not admit of a doubt. 

Strikes, with their attendant interruption of industry, 
with the disorders, violence, and destruction of property 



234 Political Economy. 



that so commonly grow out of tliem, are poor incentives 
to induce people to save their income with a view to 
investing in business enterprises. Till the laborers are 
willing to save the means of providing capital of their 
own, it is clearly their interest to do nothing that tends 
to check the saving spirit in others. 

3. Futility of Strikes in Practice. — The common 
result of strikes against individual employers shows 
plainly enough the weak point in the theory that strikes 
may raise the general level of wages. Commonly the 
strikers fail, because it nsually turns out that there are 
many other laborers who, having either no employment 
or poorer pay than the strikers, are glad to accept the 
terms these have rejected. The few cases in which this 
is not true, in which therefore strikes succeed, are cases 
in which a rise of wages is on the eve of coming about, 
without a strike, by the action of supply and demand. 

A strike for advance of pay in any industry, if made 
when business is improving or has improved, may hasten 
the rise of wages. Strikes against reduction of wages 
nearly always fail. They come at a time when employ- 
ers may have little or nothing to gain by going on with 
production, even at the reduced wages. A stoppage of 
work for a while may be a welcome relief to the em- 
ployers at such a time. A strike, in these circum- 
stances, is sure to fail. In no case is it sure to succeed. 
There can be no doubt, looking at the history of strikes 
in general, that they have been on the whole a source 
of great loss to the laborers. 



Effects of Strikes. 235 

One further reflection as to strikes is, that they are 
never directed against the most obvious source of low 
wages. The real wages of laborers depend as much on 
the prices of the things they buy, as on the amount of 
money they receive from their employers. The great 
loss of real wages comes in the difference between the 
prices the producing employers get from the traders and 
the prices we all have to pay at retail. Even if the 
direct employers of the great mass of laborers should 
raise wages to the point of foregoing all their profit, 
the difference in wages would be slight. On the other 
hand, if the cost and risks of making the exchange of 
products could be reduced one-half, the gain in real 
wages would be great. The establishment of co-oper- 
ative stores by the laborers in England was, therefore, 
a move in the right direction. It has proved a great 
success. If our American laborers would but devote to 
a similar plan a part of the energy and money they 
have wasted and still waste in strikes, there can be no 
doubt of their opportunity to raise very materially their 
real wages thereby. 

4. High Profits Favorable to High Wages. — It may 
seem to some that this puts political economy on the 
side of the capitalists in the struggle about wages. 
That is not the case. Economists have always sym- 
pathized deeply with every feasible plan for improving 
the lot of those who work for wages. They have 
always denounced all harsh and unfair treatment of 
laborers. But they cannot allow their sympathy to 



236 Political Economy. 



blind them to the facts of the case. They see what 
the labor agitators too often fail to see, namely, that 
people cannot be coerced into saving. Further, the 
economist does not look with jealousy on the profits 
of employers, for he knows that the higher profits are, 
the better hope there is for the laborers. He knows that 
high profits to-day are the best ground for expecting high 
wages to-morrow. 

What the laborers fail to get of the product of in- 
dustry, is not what the employers gain, but what they 
consume. So far as profits are saved, they become wages. 
The profits of to-day are not high at the expense of the 
wages of to-day, they are high at the expense of past 
wages, which are now beyond the reach of change by 
strike or other means. Instead, therefore, of fretting 
over the high profit of capital, laborers ought to rejoice 
in it. The thing they have some reason to grudge is 
the lavish expenditure of the capitalist class. Their 
loss is not what the capitalists gain, but what they 
spend. This is so important a principle and so contrary 
to popular theories that we shall do well to consider it 
fully. 

5. Do we Help the Laborers by Buying Goods? — 
There is a wide-spread belief that whoever buys goods 
of the merchants helps the laborers. Those who, hav- 
ing the ability to spend freely, choose to live economi- 
cally are commonly regarded as churlish and unfriendly 
to those who live by wages. On the other hand, those 
who are lavish in buying luxuries for themselves are 



Demand for Goods not a Demand for Labor. 237 

often spoken of as benefactors of the laborers. Their 
purchases are supposed to create a demand for labor 
and to promote high wages. 

This is one of the many popular ideas which political 
economy has to reject and refute. It is not true, though 
it looks true. Anybody who thinks carefully about the 
matter for a little while ought to be able to expose 
the fallacy. Observe that the question is, at bottom, 
whether it is better for the laborers that you should 
spend your money in getting enjoyable things for your- 
self, or should turn it over to them to spend. If you 
save and invest it in any form, it is sure in the end 
to reach the laborers as wages. Even if you merely 
put it in a savings' bank, the bank lends it to some 
business man in whose hands it soon becomes wages. 
The result will be that your saving adds just so much 
to the amount the laborers receive for their work. 

Perhaps the easiest way of perceiving the error of 
the popular theory is to consider it in connection with 
the circulation of money. Looking again at the diagram 
on page 134, it ought to be easy to see that the greater 
the amount returning to 1 through a, d, g, j, and q, the 
less there is left to pass through the channels for wages, 
h, e, h, I, and o. In other words, the more the wealthy 
classes spend in buying commodities for their own con- 
sumption, the lower the wages of the laborers will be. 

The laborers get, not what is spent, but what is saved. 
Those who hold that the mere purchase of products 
of labor helps the laborers, forget to ask what would 



238 Political Economy. 

happen if everybody acted on that principle. If, for 
example, the merchants and the manufacturers, instead 
of hiring laborers with the money we pay them for their 
goods, should at once spend it in buying things for 
their own enjoyment, where would the advantage to the 
laborers come in ? It is only by taking for granted that 
the business men will do what we have not done, — 
will save what they receive and hire laborers with 
it, — that anybody could hold the doctrine for a mo- 
ment. But if saving on the part of business men be 
good and even necessary for the laborers, why should 
it be less beneficial when practised by others ? 

6. The Argument from the Need of a Market. — To 
the question just asked, the advocate of the time-worn 
fallacy usually replies by urging the necessity of a 
market. Briefly stated, his argument is that "If nobody 
bought things, there would be no call for labor to make 
things." This may be freely admitted, but it has no 
bearing on the case. 

The question is not whether there are to be any 
buyers or no, but Wlio are to be the buyers ? When 
hired laborers spend their wages, they are buyers quite 
as truly as any other class. In saving money, we simply 
transfer buying power to those who live by wages. The 
question, therefore, is simply Who shall have the priv- 
ilege of buying ? Whoever has that, constitutes the 
market. The higher wages are, the greater is the market 
offered by the laborers. Even if all income could be 
saved and paid for labor, it would only amount to mak- 



Saving does not Lessen Demand for Goods. 239 

ing the laborers a market for the whole product of 
industry. 

As .to the call for labor, there would be the same need 
of labor to make things for working men and their 
families that there is to make things for the wealthier 
classes. The precise things to be made would no doubt 
be different; but that would be merely a question of 
the sort of production to be carried on, not a question 
whether any sort of production would be needed. 

7. Increase of Saving does not Lessen the Total Demand 
for Commodities. — The fact that the commodities laborers 
buy with their money are not the same that the person 
who saves the money would have bought, makes it easy 
to fall into a wrong view of the effect of saving. When 
persons who have been accustomed to spend freely 
abandon their extravagant habits, we are apt to think 
of the shopkeepers with their stocks of cigars, wines, 
silks, and laces. We see that until they sell these, they 
will not order a fresh supply ; and so the manufacturers 
may not venture to produce further stocks. When the 
buyers appear, they seem to set the whole productive 
machinery in operation, and thus to create the occasion 
for the hiring of laborers. 

But to look at the matter in this way is to omit the 
most important feature of the case. Wines and laces 
are produced only because there is a demand for them. 
Had people always saved their money instead of spend- 
ing it in buying luxurious . articles, such articles would 
not have been on the hands of the merchants awaitiuir 



240 Political Economy. 



buyers. If people should suddenly give up buying wines 
and silks, of course the manufacturers and merchants 
might lose a large part of the savings they have in- 
vested in the production and sale of these commodities. 
But let us suppose the change to be foreseen, or even to 
be gradual, so that the producers and dealers may have 
time to withdraw from the business in time. In that 
case they would still have their savings, and would 
still wish to use them so as to make profit. They 
would, therefore, continue to employ as many laborers 
as before, — merely changing the precise mode of em- 
ploying them. On their part, then, the payment of 
wages would not be lessened.^ 

Attending now to those who save the amount previ- 
ously expended in the purchase of luxuries, there ought 
to be no difficulty in seeing that all they save and invest 
is a clear addition to the wages of labor. If anybody 
doubts the existence of a market under these conditions, 
for all that the laborers could produce, let him consider 
the case from the side of the laborers. Why do they 
labor ? Is not the mere fact of their working for wa^es 
a proof that they desire products of industry ? The only 

1 Some loss of fixed capital would be likely to attend the change ; 
but the opposite change (that is, a decrease of saving and a fall of 
wages) would involve a similar loss. Sucli losses attend every change 
of fashion, and even every improvement in production. This is one of 
the risks that producers have to run. The danger tends, no doubt, 
to discourage saving, and so tends to depress wages. The ordinary 
expectation of profit nuist, in other words, be high enough, after 
allowing for these losses, to induce men to save and invest. 



How Money Complicates the Case. 241 



possible doubt in the case would be, What particular 
products do they desire as their increase of wages ? 
Whatever these products, the increase of demand would 
call forth an increased production of them. Even if they 
wished only money to lay by for future use, money is 
a product of labor. Such a demand would simply raise 
the value of money, and divert an increased amount of 
labor into the production of gold and silver. 

The whole result, then, of increased saving is to raise 
wages, to diminish the demand for certain articles and 
to increase, to the same precise extent, the demand for 
certain other articles. 

8. Obscuring Effect of the Use of Money. — We have 
seen already how much the use of money obscures the 
true nature of buying and selling. We now see that it 
has the same effect on the payment of wages. If em- 
ployers were accustomed to pay their laborers in actual 
commodities, I think that the error we are considering 
would never have arisen. Nobody could then fail to see 
the absurdity of supposing that the rich help the poor 
by lavish consumption of commodities, and injure them 
by saving as much as possible for investment. Every- 
body would perceive that the wages of those who work 
for hire consist precisely, not of what other men consume, 
but of what other men do not consume. 

The use of money brings the payment of wages into 
close connection with the exchange of commodities. It 
separates the receipt of wages into two acts : first, the 
receipt of the money from the employer, and secondly, 



242 Political Economy. 



the purchase of commodities with the money. The 
second of these acts has nothing in it, at least on the 
surface, to distinguish it from other purchases of goods. 
Yet in a very important sense it is the true payment of 
wages. The amount of money received for a day's 
work is a matter of small consequence in itself ; the 
real question of wages is how great a quantity of needful 
commodities a man can obtain for his labor. 

Further, as we have seen in a previous chapter, this 
connection between payment of wages and the sale of 
goods, makes it easy to mistake the real nature of the 
trouble, when, for any reason, there is a falling off in 
the investment of savings. The obvious thing, at such 
a time, is the decrease in the sales of goods. The accu- 
mulation of uninvested savings in the hands of bankers 
and others, is either not noticed, or is regarded as a mere 
consequence of the failing demand for goods. In this 
way, unthinking persons are confirmed in the erroneous 
opinion that when we buy commodities for our own use 
we give employment to laborers. If they reflected at 
all, they could hardly fail to see that the commodities 
which do not sell are in fact awaiting use in the pay- 
ment of real wages ; and that, but for the presence of 
money, these commodities would appear as savings in 
the hands of the employers, rather than as unsalable 
goods in the shops. 

9. Wages an Advance. — The question we are consid- 
ering goes to the foundations of political economy. A 
wdiole group of important practical questions depend 



Wages an Advance. 243 

upon the answer we give to this one. It may therefore 
be well to consider the matter from another point of 
view. 

The fundamental reason why demand for commodities 
is not a demand for labor, is found in the fact that the 
production and exchange of finished commodities requires 
so much time. If every commodity could be produced in 
a day, or a week, and could be immediately exchanged 
for such things as the producer happened to desire, there 
would be no essential difference between paying a man 
wages and buying his product. There are, in fact, a 
few cases in which the purchase of the product answers 
the same purpose as the direct hiring of the laborer 
would serve. 

If, for example, at the proper season, one should offer 
to buy wild flowers, or berries, or autumn leaves, or shells 
from the beach, or any other thing that can be ob- 
tained without much previous labor, the offer would 
be as good for the country boy as the offer of wages 
would be. It would be a demand for his labor. 

But very different is the offer to buy a suit of clothes 
from a journeyman tailor who is looking for employment ; 
or a car-load of potatoes from a farm laborer in the like 
case ; or a house from a carpenter who is out of work ; 
or a roll of cotton cloth from a mill operative ; or a ton 
of coal from a coal miner, etc, 

A little careful thinking about these two sets of cases 
will make clear the reason why, in civilized industry, the 
offer to buy goods does not give employment to needy 



244 Political Economy. 

laborers. Production takes too long to make the offer of 
any service to them. 

In considering the matter the student must take care 
to include the whole case. The production of each com- 
modity must be viewed as a whole All the labor of 
preparing the natural agents, of raising or procuring the 
materials, and of making the requisite machinery, must 
be included in the labor of producing the enjoyable com- 
modity which finally results from them. This point is 
of great importance in the study of wages. It is the 
simple fact that labor spent in getting ready to produce 
good things, has itself no immediate result that is good 
to eat or to drink or to wear. 

Though machinery and materials are bought and sold; 
and though, on the surface, there is nothing to distin- 
guish such sales from the sale of enjoyable commodities 
to consumers, yet a little reflection shows us that there 
is a very wide difference. In sales of the latter kind, the 
purchaser is taking his reward for labor or waiting. In 
the purchase of materials or machinery he is investing 
savings. 

If men receive any immediate return for labor spent 
in providing the capital used in production, it must come 
from the saved products of other labor. No matter in 
what form, or under what name the return is obtained, 
it is in the nature of an advance out of savings. 

For example, an agreement to buy of the laborers, at 
the end of each day or each week, the unfinished results 
of their work up to that point, would not differ in prin- 



Extent to which Wages are Advanced. 245 

ciple from an agreement to pay them wages. No man 
could do either without a fund of savings to be used for 
the purpose. He could not use the very things pro- 
duced by the laborers themselves, until they had got by 
the work of creating capital, and had begun to turn out 
true commodities. All the finished commodities received 
by the workmen for their labor up to that point are 
advanced to them out of the saved products of other 
labor. 

10. Extent of the Advance. — Perhaps the simplest way 
of estimating the extent to which wages are advanced 
out of savings is to look at the industrial system as a 
whole. Air the contrivances and arrangements for pro- 
ducing and exchanging enjoyable commodities, the three 
classes of things to which we give the general name 
of Capital, represent labor which could not have been 
rewarded by anything of its own producing. 

If the whole existing apparatus of production and 
exchange were swept away, a great deal of labor would 
be required for restoring it. That labor would have to 
be applied without immediate return of its own yielding. 
Anybody getting a weekly allowance of enjoyable com- 
modities, or the means of buying such, in return for this 
labor, would be getting payment in advance of his own 
production. The length of time it would take to replace 
the capital of the country, measures pretty accurately the 
extent to which wages, in our existing system, are paid 
in advance of the natural return for labor. 

The extent to which wages are advanced is much dis- 



246 Political Economy. 



guised by the division of labor among employers. Each 
employer seems as a rule to recover pretty quickly, by 
the sale of his product, the amounts paid out to his 
laborers. The manufacturer of cloth, for example, may 
sell his product from week to week, almost as quickly as 
it is made ; and with the proceeds he pays his laborers. 
So that his advance of wages seems to be slight. 

But this is to look only at the surface of the matter. 
The manufacture of cloth is but one stage of the work 
of producing coats. When the manufacturer buys his 
materials, he in fact advances wages; he pays for all 
the work already done upon them ; he gives free savings 
for capital, just as if he had himself hired the laborers 
wlio produced the materials. 

Further, at the very outset of his enterprise he had 
to make large outlays of savings in the construction of 
buildings and in the purchase of machinery. These ad- 
vances consisted mainly of wages paid to the laborers 
who produced the buildings and machinery. It is quite 
immaterial whether he himself appeared as the direct 
employer of these laborers, or simply took over by pur- 
chase the work of other employers. In either case, what- 
ever the laborers receive for producing capital can only 
come from savings. And, as to the extent of the ad- 
vance, we readily see that years must elapse before the 
savings paid for clearing land, opening mines, construct- 
ing railways, ships, buildings, machinery, etc., can be 
fully recovered through the commodities wliich these 
help to produce. 



A Practical Test Suggested. 247 

11. Fallacy of Denying the Advance of Wages. — Mr. 

Henry George and some other writers deny that wages 
are a real advance, alleging that, before receiving wages, 
the laborers always add a full equivalent to the posses- 
sions of their employers. The question may easily be 
put to a practical test by anybody who accepts Mr. 
George's doctrine. It is only necessary that he shall 
prevail on a body of laborers sharing his view to join 
him in demonstrating, by actual experiment, that wages 
can be paid without the advance of savings. 

It would only be necessary that he and they should 
withdraw by themselves, and begin the production of 
any commodity or commodities they please. The leader 
must pay his men week by week, just as ordinary em- 
ployers do ; but he is to avoid the use of savings in 
doing so. He is even to avoid the indirect use of other 
men's savings. If he resorts to exchange of products 
with outsiders, he is to offer only finished commodities. 
Further, he must make no covert use of savings by an- 
ticipating the results of the exchange through advances 
from the dealer. He must wait until his product finds 
its way to the consumers and their return commodity 
finds its way to him. On these terms he is to use the 
results of each week's labor with entire freedom, as 
resources for the payment of wages to his men. 

Anybody who tries this experiment, or even considers 
how it would be likely to- work if tried, will scarcely be 
disposed to doubt the advance of wages. He must per- 
ceive that the addition a laborer makes to his employer's 



248 Political Economy. 



possessions each week, is a very different thing from the 
assortment of enjoyable commodities the laborer must 
have as wages. The difference constitutes the whole 
occasion for the existence of wages. 

12. Production by Prison Labor. — The foregoing prin- 
ciples have an obvious bearing on the vexed question 
of prison labor. There are two chief objections made to 
the employment of such labor in production; first, that 
it lessens the demand for free labor, and secondly, that it 
imposes an unfair competition on free laborers. 

The first objection assumes that there is a limit to 
the total demand for commodities ; that, therefore, if any 
portion of the demand be supplied by prison labor, the 
opportunities for free laborers to earn wages are, to that 
extent, abridged. The assumption is plausible ; but a 
little careful thinking shows that it is not true. It is 
simply one form of the notion that general overproduc- 
tion is possible. If it were true, it would follow that 
every invention which increases the productiveness of 
labor is injurious to the laborers. It would even follow 
that destruction of commodities by fire, shipwreck, etc., 
is a good thing for those who live by wages. In fact, 
one occasionally hears these corollaries of the doctrine 
gravely advanced as unquestionable truths. 

However great the supply of commodities may be, it 
can never outrun the desire to possess commodities. You 
will never hear of anybody who has more than he wishes 
to have, or who is ready to part with his product with- 
out an equivalent of other products. There is, in fact, 
no limit to the desire for wealth. 



The Question of Prison Lalor. 249 



The owners of the existing supply of goods and money 
can safely be counted on to use a portion for their own 
enjoyment. The rest they will wish to use so as to gain 
more wealth, and this can be done only by hiring pro- 
ductive laborers. The question, then, is whether there 
is a limit to the amount of commodities the laborers are 
willing to receive as wages. Those who assert that the 
demand for commodities is limited, forget that the labor- 
ers constitute the great market for the products of labor ; 
and that they stand ready to receive all, and more than 
all, that others may spare. 

If prison labor adds anything to the general supply 
of good things, the addition can have no tendency to 
check the desire of the capitalist class to gain increase 
of wealth. Neither can it diminish their resources 
for saving ; on the contrary, it tends to increase them. 
Consequently, the most effective use of prison labor can 
only tend to raise the wages of free laborers. 

The second objection rests on the fact that prisoners 
do not work for wages. Those who employ them are 
therefore said to have an unfair advantage over employ- 
ers of free labor, unless the free laborers are willing to 
accept very low wages. Herein lies the unfair compe- 
tition of which so much complaint has been made. 

This objection is, at bottom, identical with the other. 
It assumes that there is not field enough for free labor 
without coming into hurtful competition with the mal- 
efactors. But evidently there is no reason why the 
classes of commodities to which prison labor is applied 



250 Political Economy. 

should not be kept in due proportion to other commodi- 
ties. Unless there be needless changing of the articles 
produced by prisoners, this contribution can be reckoned 
on as a regular portion of the supply ; and ordinary in- 
dustry can as easily adjust itself to the situation as it 
could if the prisoners were so many free laborers. 

Unless the mistake be made of producing too great a 
relative supply of those particular articles, there is no rea- 
son why they should not sell at their natural value ; and 
if they sell at their natural value, the fact that a portion of 
the supply comes from the prisons can have no ill effect on 
the wages and profits of those who produce the remainder. 

There is, in fact, no necessary competition, fair or 
unfair, between free laborers working for hire, and pris- 
oners undergoing penal labor. The feature to which 
objection is made is precisely the point at which, so far 
as free laborers are concerned, the benefit of prison labor 
comes in. If the prisoners were free they would be draw- 
ing full wages from the savings offering for investment ; 
they would be in real competition with other laborers of 
their grade. Being in prison, all they receive for their 
labor is their prison fare, and this they would receive 
even if they were kept in idleness. All that they pro- 
duce is therefore a clear gain to the rest of the commu- 
nity. The more they produce, the more there will be 
for honest men to enjoy. Even if they should steadily 
furnish the whole supply of some articles, and should do 
so at prices far below the natural value, the result would 
be a benefit and not an injury to the rest of the community. 



CHAPTER XXL 

PROFITS OF INDIVIDUAL EMPLOYERS. 

1. Outlay and Return of the Individual Employer. — 

The aggregate profits of the whole body of employers 
are measured, as we have seen, by comparing the product 
of industry with the cost to them of getting it produced ; 
that is, by comparing their outlay with the return. 
Further, the whole outlay, in this general case, resolves 
itself into the real wages paid to the laborers. 

The profits of the individual employer must also be 
measured, of course, by comparing his outlay with his 
return. But there is a very important difference between 
the two cases. The outlay of the individual employer 
does not consist wholly of wages ; the larger part of it 
usually consists of payments made to other business men 
for materials, machinery, etc.^ Again, on the other side 
of the account, his return, in the sense in which his 
profits depend on it, does not consist of the product he 
obtains by the outlay. It consists rather of the amount 

1 For an illustration of this see the table on page 103. Of course 
the proportion of wages to other outlay differs widely in different 
industries. The whole matter depends on the extent to which divi- 
sion of labor is applied to the work of employing labor. The more 
minute the subdivision, the greater the ratio of other outlay to wages. 

251 



252 Political Economy. 

he receives for the product when he sells it; and this 
depends quite as much- on the price he gets as it does 
on the quantity he has to sell.^ 

2. Two Sources of Individual Profit. — Evidently, then, 
the profits of the individual employer do not rest on so 
simple a basis as aggregate profits. There is but one way 
by which the whole body of employers may make profits, 
namely, by getting the laborers to produce a greater quan- 
tity of wealth than they pay them as wages. But there 
are two ways by which the individual employer may gain 
profits : first, by getting laborers to produce more than he 
pays for their services ; secondly, by gaining, through 
fortunate trading, a part of the profits produced by other 
men's laborers. 

In practical business these two ways of gaining profit 
are inseparably combined. Under division of labor no 
man can be an employer without being also a buyer and 
seller. His profits depend on his success in both capaci- 
ties. Both the cost to him of his product, and the return 
for his outlay, depend in large part on the results of his 
dealings with other business men. Though the necessary 

1 This point did not arise to trouble us in the case of aggregate 
profits. In the general case we can compare real wages with product 
by physical measurement, because all the commodities included in 
wages are reproduced in the product, — with a surplus over, which 
constitutes the general profit. Aggregate profits are not affected by 
changes of value, since, when one commodity falls in value, others 
rise. In fact, value can hardly be said to belong to commodities in the 
mass, or to the sum of wealth. It belongs rather to one commodity as 
compared with another, when the question is of exchanging one man's 
wealth for another man's. 



7^e Measure of Individual Profit. 253 

buying and selling between employers create no profits, 
they do determine very effectively who' is to own and 
enjoy the profits that are created by the general industry 
of the community. 

3. Money a Common Measure of Outlay and Return. — 
In computing individual profits we need to have the out- 
lay and the return expressed in terms of the same denom- 
ination. Otherwise, we cannot compare them and say 
how great the difference is. We cannot, for example, in 
the case of any one employer, compare the general assort- 
ment of commodities constituting the real wages of his 
laborers with the case of shoes or the bale of cloth 
they help to produce. Both wages and product must be 
expressed in terms of a common measure. 

Tor this purpose it is most convenient to use money. 
In point of strict fact the individual employer does 
not pay the real wages of his laborers ; his agreement is 
to pay them certain sums of money. In spending their 
money the laborers may buy shrewdly and get higher 
real wages ; or they may buy badly and get less for 
their labor. But this does not affect the profits of their 
employer. His outlay is, in strictness, the money he 
pays. The real wages of his laborers are drawn from 
the general capital of the community : from that portion 
of the general capital that consists of commodities in 
the hands of the retail dealers. 

Expressing both outlay and return in money, we have 
a basis for reckoning profits. This mode is, of course, 
open to the danger of error through changes in the 



254 Political Economy. 

value of money. But it has the advantage of being 
simple, and the further recommendation of being the one 
in practical use. Of course, real profits consist in in- 
creased command over commodities in general. In order 
tliat profits reckoned in money shall represent the real 
result of an employer's outlay, it is necessary to apply 
a correction for any rise or fall occuring in the value of 
money between the outlay and the return. This is par- 
ticularly necessary v^here, as happens in the case of fixed 
capital and many other forms of productive expenditure, 
considerable periods of time intervene between the outlay 
and the completed return. 

4. Factors on which Individual Profits Depend. — Un- 
derstanding this correction to be made wherever nec- 
essary, we may say that each employer's share in the 
aggregate profits of industry depends on three factors : 

(1) The cost to him of his product (meaning thereby 
the amount of money each yard, pound, bushel, or other 
unit costs him). 

(2) The price he obtains for it. 

(3) The quantity he produces (or acquires in other 
ways).^ 

1 The word " employer " is to be understood as including all per- 
sons who operate with savings, whether they actually hire laborers or 
not. Similarly the word " produce " is used in this discussion, to in- 
clude all ways of acquiring products with a view to profit. It would 
cumber the treatment of profits too much to speak separately, in 
every case, of merchants, bankers, carriers, speculators, etc. Further, 
it is to be remembered that the word " laborer " includes salesmen, 
book-keepers, hired managers, etc. 



Variable Elements of Money Cost. 255 

Each of these factors is variable. Each of them may 
differ in the case of different employers. It remains for 
us to note the principal causes of variation and the ways 
in which individual profits are affected thereby. 

5. Cost of Capital Differs to Different Employers. — 
The cost of a product to the employer may be divided, 
as we have seen, into two general classes of payments : 
first, the amounts paid for machinery and materials to 
other employers ; secondly, the amounts paid as wages 
to his own laborers. The cost of capital bought from 
other employers may vary in two distinct ways : it may 
differ in price at different times and to different buyers; 
secondly, the quantity or quality of product it yields 
may differ to different employers. 

One employer may have the sagacity and good fortune 
to buy the most suitable articles, and to buy them at the 
most favorable time, and on the most favorable terms. 
Another, through incapacity or inadvertence, may buy 
less shrewdly, buying less suitable articles, or buying 
them at the wrong time and place, or in wrong quan- 
tity. Prices, it must be remembered, are never- long 
stationary and are never quite uniform. It is usually 
possible to get a good bargain, if one knows how to 
go about it. There is always danger of getting a bad 
bargain, unless one has the requisite knowledge and 
takes the requisite care to avoid it. 

Now, in paying for materials or machinery, the pur- 
chaser does not merely replace to the seller the savings 
spent in getting them produced. The price includes also 



256 Political Economy. 

whatever of profit the seller is to have for his share in 
producing the commodities which ultimately result from 
the macliinery or materials. How much the eventual 
profit is to be cannot be known yet. The buyer takes 
over the chances, paying the seller a sum which may 
later prove to have been indefinitely greater or less than 
his fair proportion. The effect on the profits of each is 
obvious. 

Of course prices of machinery and materials, like the 
prices of other things, tend to conform, on the average, 
to the cost of production. But the price in any partic- 
ular case may vary widely from this standard. Also, the 
cost of production itself is subject to changes. The em- 
ployer who buys when the market price is lowest makes 
higher profits, other things being equal, than the one 
who buys when the market price is high. The employer 
who buys his machinery just after an important im- 
provement has been introduced in the production of it, 
has a great advantage over the one who had the misfor- 
tune to buy just before the new inventions were made. 
One "has the ill fortune to have laid, in a large stock of 
some necessary material just before a great cheapening 
of it through the discovery of new sources of supply, or 
just before the discovery of a cheaper and better substi- 
tute makes the material no longer necessary. Another 
has the good fortune to escape loss by the change. And 
so on. Employers take individually the risks of indus- 
try. It makes a great difference to each whether his 
risks in the purchase of capital turn out well or ill. 



Variable Elements of Money Cost. 257 

Secondly, the cost of machinery and materials may 
vary according to the employer's success in getting the 
best results out of them in actual use. One employer 
may have great skill in arranging the internal economy 
of his establishment, in keeping down the wear and 
tear of machinery and buildings, in preventing waste of 
materials, and in turning everything to the best account. 
Another may fail in one or all of these respects, through 
lack of superior judgment, or want of energy, or through 
over-confidence in the faithfulness of subordinates. Be- 
sides these and similar elements of difference, which 
good management may be supposed to control, there are 
not a few others which xvo human sagacity can foresee or 
wholly prevent, — such as ill-health, accidental injuries 
to machinery, destruction by fire or flood, and (in such 
industries as farming) ravages of insects, local drouths, 
etc. These are matters as to which scarcely two em- 
ployers fare wholly alike. The result is considerable 
divergences in the proportion of product to outlay for 
machinery and materials. 

6. Cost of Labor Differs to Different Employers, — As 
to wages as an element in the cost of products to the 
employer, it is evident that here again two things are 
to be taken into the account: first, the rate of wages 
paid, and secondly, the efficiency of the laborers. Each 
of these may differ in the case of different laborers. 
Both must be taken into account in order to determine 
the cost of each man's labor to the employer, 

- Wages for any given grade of labor may differ consid- 



258 Political Economy. 



erably, as we have seen, in different parts of the country, 
owing to the expense and other difficulties that laborers 
meet in changing their abode. The employer who has 
his business in a region where wages are low, has, in this 
respect, an advantage in cost of labor over producers of 
the same commodity in other parts of the country. 

Again, on the side of efficiency, it is certain that some 
employers have the faculty of disposing and directing 
their laborers in such a way as to turn their labor to 
better account than other employers in the same busi- 
ness. With no greater outlay in wages they succeed in 
obtaining a greater product. It makes a great difference 
whetlier the parts of the productive process are or are 
not apportioned in the best way ; whether labor is econo- 
mized in every possible way or is wasted ; whether the 
workmen perform their work with energy or with slack- 
ness : and so on. These are points that depend chiefly 
on the ability of the manager. Other things being 
equal, the employer who is most successful in these 
respects gets his product at the lowest cost. 

7. Cost of Natural and Other Advantages. — There is, 
finally, a whole group of circumstances connected with 
the natural advantages for production, as to which 
scarcely two employers in the same industry stand on 
a footing of entire equality. Possession of the best 
kinds of the requisite natural wealth, nearness to the 
best sources of materials, nearness to the best markets 
for the product, cheap transportation, and other similar 
advantages, are of great importance to employers. It is 



Variable Elements of Money Cost. 259 

true, as we shall see later, that those who have the use 
of special advantages such as these, may have to give 
a full equivalent for them. But the amount of the pay- 
ment in any particular case is a matter of agreement 
between men. Here, as in the purchase of machinery and 
other capital, one employer may obtain special advantages 
for less than they are worth. Another may make a bad 
bargain, may find that he has overrated the extent of the 
advantage, and, by paying too much for it, has increased 
considerably the money cost of his product. 

8. Interest on Borrowed Savings. — Most employers 
make more or less use of borrowed savings. The inter- 
est they pay for these loans may be regarded as an item 
in the cost to them of their product. The loan, it is 
true, is presumably a source of gain to the borrower. 
It enables him to do a larger business than he could 
have done without it; and from this additional business 
he expects to make more than he pays for the loan. 
But, it remains true that the interest is an item in the 
cost to him of the additional product he obtains by 
means of the loan. The lower the interest he pays, the 
greater his gain, in any given circumstances, from the 
additional business done by borrowing. Here, as in so 
many other things, the employer of large means and 
established credit has an advantage over employers of 
small resources and inferior credit. The great compa- 
nies and strong business houses can get loans at consid- 
erably lower rates of interest than ordinary employers 
can, with corresponding advantage in making profits. 



260 Political Economy. 



It must not be supposed, however, that a low custom- 
ary rate of interest is on the whole a thing to be desired 
by employers. On the contrary it is a sign of low profits. 
It shows that the prospects of making gain by the use 
of savings, whether one's own or borrowed, are not very 
encouraging. In other words, it shows that wages are 
high in comparison with the productiveness of labor. 

9. Advantageous Sales as a Source of Profit. — Assuming 
the value of money to be constant, or that a correction is 
made for variations of its value, it is easy to see that the 
profits of the business man in respect of any given quan- 
tity of product, are measured by the difference between 
the money cost of it to him and the price he obtains 
for it. 

When the price of a product is above that of other 
things produced by the same amount of labor and wait- 
ing, either the employers engaged in producing it, or the 
laborers, or both, have higher rewards than the producers 
of other things. The sharing of the extra returns be- 
tween employers and laborers depends on the greater or 
less readiness with which the laborers in other industries 
can be drawn in at need, to take part in the production. 
In cases where this can be done freely, the benefit of 
the high market value accrues to the employers. If, 
however, there be any serious barrier to free competition 
on the part of outside laborers, the laborers who are in 
the industry may obtain a part of the advantage. If the 
barrier, and consequently the high market value, be per- 
manent, they are certain to get all of it. 



The Money Return Variable. 261 

Apart from the special profits due in particular indus- 
tries to high market value of their products, it is often 
possible for the individual employer to get a higher price 
for his product than others are getting for the same ar- 
ticle, or one equally good. In the many fluctuations of 
price, it often makes a considerable difference whether 
one sells his product to-day or holds it back till to- 
morrow. The man who can best foresee the course of 
the market has a decided advantage. This is especially 
true in those industries in which contracts are made to 
deliver goods in the future at a fixed price. Much extra 
profit is often made by contracts entered into at the 
right moment. 

Again, the great body of consumers are either too 
busy or too careless to take the trouble of investigating 
and comparing the qualities of different makes of an 
article. They are apt to buy the kind they have found 
satisfactory in the past, just as they are apt to buy of 
the same dealer year after year. This gives an enormous 
advantage to producers who have an established reputa- 
tion. They can charge more for their goods than those 
can whose reputation is yet to be made ; and even at the 
higher price they can find a steadier market and a more 
ready sale. Many a fortune is made simply by the pos- 
session of an established brand, or a well-known name. 
The immense extension of " advertising " in our day, and 
the many devices adopted to bring new wares into notice 
are sufficient to show how great is the commercial value 
of having one's particular "make" of an article, or one's 



262 Political Economy. 



particular shop, favorably kept in mind by as many 
persons as possible. 

10. Losses in the Sale of the Product. — Passing now 
to the cases in which commodities have to be sold at a 
low price, it is clear that the losses resulting from this 
cause must usually fall on the employer. The laborers 
may suffer reduction of wages, but the employer may 
suffer total loss of profits. Hard as it is for laborers to 
change occupations, it is still harder, in fact practically 
impossible, for the employer to change. It often hap- 
pens that the employers in an industry are obliged to go 
on for a considerable period without any profits, — per- 
haps even at a loss, though at a smaller loss than total 
cessation would imply. This is one of the risks every 
employer must run. Whatever he produces, it may 
happen that other men shall unduly extend the produc- 
tion of the article, thus involving him in difficulties and 
losses, which no skill or forethought on his part could 
avert. 

There is, connected with the sale of the product, a 
further danger of loss growing out of . the fact that 
products are so largely sold on credit. Every producer 
is practically compelled to follow the custom of his trade 
in this respect. Those who are fortunate enough to re- 
ceive payment, when due, for all they sell, probably 
make higher profits because of the risk they have run 
in selling on credit. Those, however, who are unfortu- 
nate in this regard, not only fail to make a profit, but 
even lose the original savings invested in the venture. 



Double Effect of Volume of Business. 263 

A few serious losses of this kind may undo the profits of 
years, or may even involve in bankruptcy the employer 
who incurs them. Of course here, as in other matters, 
the risk may be greatly reduced by careful management ; 
but it is never wholly absent from sales on credit. 

11. Scale of the Employer's Transactions. — A com- 
parison of the money cost with the selling price of the 
product, shows the ratio of the employer's outlay to his 
return, or the rate of his profit. To determine the total 
amount of his profits a third factor is necessary, namely, 
the amount of business he does on these terms. The 
greater his capital, the greater, at any given rate, will 
his share of the general profits be. 

The importance of the scale of his transactions in this 
respect is too obvious to need discussion. There is, how- 
ever, another less obvious way in which an employer's 
profits are influenced by the volume of business he 
carries on. Some of the items in the money cost of a 
product are less in proportion to the quantity produced, 
where business is done on a large scale than where it is 
done on a small scale. This is especially true of what 
may be called the general expenses. It is about as easy 
to conduct a business of a million a year as one of half 
a million. The purchase of supplies, the book-keeping, 
the correspondence, the general oversight and planning 
of the work, are not much more onerous or costly in the 
one case than the other. There is, therefore, a compara- 
tive saving of cost, in these respects, in the larger scale 
of business. 



264 Political Economy. 



Again, the large buyer can usually buy things more 
cheaply than the small buyer. The employer who pro- 
duces on an extensive scale can get his materials and 
machinery at lower prices than the employer who uses 
but small quantities in comparison. 

Thirdly, in a large establishment more effective divis- 
ion of labor is often possible ; also more complete appli- 
cation of labor-saving devices. In a large business it 
often happens that machinery can be economically used 
to do things which, in a small business, have to be per- 
formed by hand, because there is not enough work to 
be done to keep a machine busy. 

In these and some other ways, various economies in 
the cost of the product can be introduced as the scale 
of operations is enlarged. On the other hand, a very 
large business is under some disadvantages. The larger 
the scale of operations, the more difficult it becomes 
for the employer to exercise a minute supervision over 
ail the details. He has to leave more to the care of 
hired assistants, wliose interest in the business can never 
be as keen and stimulating as his own. In a very large 
establishment there is apt to be a good deal of waste, 
through neglect of opportunities for small economies of 
various kinds. The little odds and ends, which, in the 
yearly aggregate amount to a considerable sum, are not 
sufficiently cared for. Then, there is a limit beyond 
which no ordinary business can be extended without the 
danger of losing, even in its greater features, that unity 
of management which is essential to success. There is. 



Growth of Business Corporations. 265 

I suppose, a most advantageous scale of production, or 
of trade, in each case ; and the employer who hits this 
happy mean has the benefit of his sagacity in enhanced 
profits. 

The most economical and effective scale of operations 
would seem to depend in part on the nature of the busi- 
ness, and in part on the capacity of the employer him- 
self. The tendency of our time is undoubtedly towards 
large industrial establishments. Large mills, factories, 
and stores seem to be gradually superseding the smaller 
ones. Business that used to be carried on by single indi- 
viduals and " firms " is now passing into the hands of 
incorporated companies, with large capital stock and 
highly extended operations. This is practical evidence 
that, in spite of some drawbacks, the cost to the em- 
ployer of each unit of product is less where production 
is on a large scale than where it is on a small one, — 
provided only the management be in competent hands. 
Men who have demonstrated their ability to conduct 
large enterprises successfully are much in demand as 
managers, and are able to obtain for themselves salaries 
which, a century ago, would have seemed fabulous.^ 

The new system seems to be especially applicable to 

1 In the case of corporations whose business is conducted by hired 
managers, with or without a board of directors, 'the company is the 
real employer, since it supplies the savings and takes the risks of the 
enterprise. The hired manager, as such, is simply a skilled laborer 
in the company's service. The arrangement gives persons of means 
the chance to get more than mere interest for their savings, while 
escaping most of the personal labor of management. 



'2.66 Political Economy. 



industries that need large fixed capital, as is the case 
in transportation, mining, and most kinds of manufact- 
uring. Perhaps the most notable example is seen in the 
case of railroads. A generation ago a railroad extending 
a couple of hundred miles was considered a large one to 
be under one management. Now a few great companies 
control the bulk of the railroad business of the country, 
each of them owning thousands of miles of track; and 
the process of consolidation is still going on. The great 
improvement and cheapening of the service that have 
accompanied the movement, though mainly due to other 
causes, are no doubt partly to be ascribed to the greater 
efficiency and economy of the new plan. It geems to be 
a real industrial improvement. 

We may note, in passing, that the recent tendency 
towards combinations and " trusts " among mining and 
manufacturing companies, is a very different thing from 
the movement just spoken of. The enlargement of the 
scale of business was the result of an effort to lessen 
cost ; the trust is primarily designed to keep the price of 
an article higher than it would be under free competi- 
tion. That trusts do sometimes lessen cost, by preventing 
the waste of savings that attends reckless competition, is 
no proof that they are an improvement in industry. J'ree 
competition has some drawbacks, like every other human 
institution ; but it offers the only sure guarantee that 
every known device for lessening the cost of commodities 
shall be faithfully and promptly applied, and that the 
general mass of men shall have the benefit. 



Inequalities of Profits. 267 

12. Uncertainty of Individual Profits. — It is clear from 
what has been said that the profits of the individual 
employer depend on too many variable elements to be 
either uniform or certain. The business man has to bear 
the risks of industry. At every step in the complicated 
round of transactions he carries on, he is face to face with 
many chances of loss as well as of gain. The wages of 
the laborer, the interest of the lender, and the rent of the 
landlord, may be settled and secured in advance. The 
employer alone must rely on his own skill and good 
fortune to win his profits in the results of his venture. 
While, therefore, wages, interest, rent, and even the aggre- 
gate profits of the whole body of employers, are governed 
by fairly definite principles, the profits of the individual 
employer must always remain largely a matter of chances. 
It is impossible that certainty or uniformity should char- 
acterize the incomes of men to each of whom every 
change in modes of production, in the courses of trade, 
in public taste, in prices, every shock to credit, the acci- 
dents of times and seasons, may bring increased gains or 
heavy losses. 

The yearly profits of the individual are not made at 
a uniform rate on every transaction. They are rather a 
compound result reached by many strokes of business, 
some of them highly profitable, others indifferent, and 
still others a source of loss. Nearly every man who 
operates with savings has his good periods and his bad 
periods. At times fortune seems to turn against him ; 
many things go amiss and losses multiply. At other 



268 Political Economy. 

times most things turn out well and his gains are large. 
Each man's rate of profits depends on the proportion of 
his ventures that turn out well; and this, as everybody 
knows, differs widely in the case of different employers. 

While, then, we hold that, under free competition, 
profits tend to equality in the various industries, we 
must not infer that this implies a tendency to equality 
in individual profits. It means only that freedom of com- 
petition tends to keep all the industries about equally 
promising, as fields for the employer's enterprise. It 
remains true that the employer who has energy, skill, 
foresight, large savings and good fortune, is likely to 
make much higher profit in any industry than the one 
who is deficient in any of these respects, even though 
tlie two should engage in the same business, at the same 
time, and in the same town. 

Note. — It may seem to some that the foregoing treatment makes 
too little of the connection between the individual employer's profits 
and the production carried on by his laborers and himself. I think, 
however, that all who consider with care the whole case, will conclude 
that there is no way of identifying the profits of the individual em- 
ployer with the contribution made towards the product of industry by 
his laborers, over and above their real wages. In the first place, as 
pointed out in the text, their real wages are drawn from the capital 
of the dealers from whom they buy rather than from their own em- 
ployer's savings. In the second place, though we have to speak of 
their product, as if it were something made by them wholly apart 
from other producers, we know that in fact they do only a part of 
the work of producing a commodity, since they use, at every turn, the 
results of other men's labors. Their share in production is conse- 
quently merged in the general product of industry, in ways that defy 
distinction, except through the slippery and changeable medium of 
value. 



Inequalities of Profits. 269 

It may, however, be urged that their product and their real wages 
may be compared with each other in terms of the quantity of labor 
represented by each. That is no doubt true, but the comparison 
would give us, at best, their contribution to the general mass of profits. 
It would give no certain measure of their own employer's profit, so 
long as prices may fail, and in not a few cases do always fail, of con- 
forming to the quantity of labor each article represents. A man's 
laborers may do as well for him in every respect this year as last 
year, and for the same rate of wages ; yet he may be losing this year, 
although last year he may have made large profits. If the prices paid 
and received by each employer always followed cost of production, 
or even employer's cost, the problem of Individual profits would be 
vastly simpler than it is. 

If we include in employers' cost interest on borrowed savings, it 
may seem that we ought also to include the self-denial (or abstinence), 
through which employers provide savings of their own. This would 
be true if our object were to make a complete analysis of the sacrifices 
employers must make in getting commodities produced. In that case 
we should have to include the personal labors of employers, as well as 
their abstinence. But the abstinence and the personal labors of the 
employer are not elements of cost in the sense in which profits depend 
on it. They are rather the double sacrifice of which profits are the 
reward. Cost, in the sense in which it determines profits, consists 
wholly of payments made to other men. The name " Money Cost " 
describes its real character. 



CHAPTEK XXII. 

INTEREST ON BORROWED SAVINGS. 

1. Nature of Interest. — There are in every community 
many persons who have savable income, but are them- 
selves either not willing or not qualified to become em- 
ployers of labor. On the other hand, there are always 
employers who see ways of profitably extending their 
business beyond the limits their own savings would im- 
pose. Out of these two facts has grown up a very ex- 
tensive system of commercial loans. Under this system, 
persons who merely save are enabled to obtain a part of 
the profits of industry. They loan their savings to em- 
ployers who agree to repay the loan at a fixed date, with 
an increase called Interest. It is a part of our task, as 
students of political economy, to consider how the rate 
of interest is determined. 

On the side of the borrower interest is a payment for 
the use of other men's savings. On the side of the lender 
it is chiefly a reward for abstinence. Since there is 
always a possibility, greater or less, that the borrower 
may fail to pay back the loan promptly and fully, the 
rate agreed on includes something for the risk the lender 
runs, — a sort of premium levied from all borrowers to 
make good the losses caused by the failure of some 
270 



Interest no Part of all Profits. 271 

among them to repay their loans. In common usage, 
the name of Interest includes both the reward of absti- 
nence and the compensation for risk. Economists usu- 
ally restrict the term interest to the first alone. It does 
not greatly matter which use of the word we follow, so 
long as we are clear as to the existence of both elements 
in the payments made by borrowers. 

The rate of interest, in the popular sense, differs con- 
siderably to different borrowers. This arises mainly from 
differences in the quality of the security given for the 
repayment of the loan. It arises in part, however, from 
differences in the form of the loan, the period for which 
it is to run, the provisions of law regarding it, etc. The 
more completely any given investment meets the wishes 
or the needs of investors in these respects, the lower the 
rate of interest the borrower needs to pay. Thus, as 
between bonds otherwise equally desirable, investors 
prefer those that have long to run. Again, the law 
singles out certain bonds for the investment of trust 
funds. United States bonds are the jpnly ones that can 
be lawfully deposited as a pledge for the redemption of 
National Bank notes. Of course bonds are singled out 
in this way by reason of the superior credit of the issuers. 
The interest on them would therefore be low in any case. 
But the special advantages conferred by law on these 
bonds enable the issuers to borrow at still lower rates 
than they could otherwise do. 

While, then, we must speak of the rate of interest as if 
it were uniform for all borrowers, we must bear in mind 



272 Political Econoiny. 



that, in practice, borrowers pay very different rates ac- 
cording to the quality of the assurance given for repay- 
ment, and all the special features of the loan in each 
case. 

2. Relation of Interest to Profits. — It is to be under- 
stood that interest, as here discussed, relates only to 
payments for the use of savings actually borrowed. As 
to savings owned by the employers themselves, we have 
no need to say anything. For his sacrifice in abstaining 
from the use of this wealth, each employer has no doubt 
the prospect of a reward ; but it is combined when he 
receives it, with the reward of his personal labor. There 
is nothing in the nature of profits, nor in the process by 
which they are gained, to tell us* how much is for the 
abstinence and how much for the labor of management. 
As well seek in the hewn timber for some sign to tell us 
how much is due to the axe, and how much to the man 
who has wielded it. No man can be a true employer 
without savings of his own as a basis for his operations. 
If it be assumed that for these savings he has a separate 
and definite reward, called interest, there is at least no 
ground for assuming that this reward corresponds with 
the interest he might obtain by lending his savings to 
other men, or that any other man would have loaned 
him the amount on any terms.^ 

1 Wages and profits (or outlay, return, and difference) are quanti- 
ties definitely marked out by the very process of carrying on produc- 
tion by means of hired labor. But interest, considered as a reward 
of all abstinence, has no such basis of determination. It is merely 
inferred that because employers pay such and such rates for loans, 



Steadiness of the Supply of Loans. 273 

Interest, so far as actually determinate, is mainly a 
reward of abstinence separated from the labor and risks 
of employment. Interest in tliis sense is not a universal 
element or share in all profits. It is simply a payment 
made by employers for the use of savings in addition to 
their own; the amount of the payment being fixed in 
advance, and due to the lender in each case, whether 
the loan has been a source of gain or of loss to the 
borrower. Of course there is a relation between the rate 
of interest employers will agree to pay for loans, and 
the profit they expect to make by means of them. In- 
terest can never be, for long, as high as the general rate 
of profit. How far it may ordinarily stand below the 
rate of profit depends very much on the disposition and 
inclinations of those who, in each country, own the mass 
of the general savings. If they be much averse to active 
business, they may forego a large part of the profits of 
capital, for the sake of the ease and supposed dignity 
of living without a commercial occupation. If, on the 
other hand, they be well inclined to the stir and enter- 
prise of business life, the rate of interest may ordinarily 
stand well up towards the rate of profit. But we may 
safely assume that it can nowhere be always equal to it. 

3. Interest Depends Immediately on the Demand and 

Supply of Loanable Savings. — Interest being a payment 

they get the same, and only the same, returns for their own original 
savings. Eemembering that it is by means of his own savings that 
the employer lifts himself out of the condition of a wage-earner, and 
makes the gains of an employer possible for himself, we easily see the 
fallacy of the inference. 



274 Political Economy. 

fixed by agreement between borrower and lender, it is 
largely governed by tbe same principles as the price of 
a commodity. There is a current or market rate depend- 
ing on the siq^ply of savings offering for loan at the mo- 
ment, as compared with the demand for loans. There is 
also, for each country and time, something like a natural 
rate of interest, to which the market rate tends to return 
after every fluctuation. The market rate tends to be 
such as to make the deinand from day to day equal to 
the existing supply. The natural rate is that rate which 
causes people to save for loan as much, and only as much 
as there is a demand for at that rate. The market rate 
has reference to some particular condition or case of sup- 
ply and demand. The natural rate has reference to the 
strength of the saving spirit among non-employers who 
have savable income, and to the permanent or average 
demand for loans. 

The amount saved from month to month by non- 
employers is fairly constant. Many of them save without 
reference to the interest they can obtain. Most of the 
saving "for a rainy day," for old age, for children, etc., is 
probably of this character. Some may even save more 
strenuously, after what promises to be a lasting decline 
of interest, than they did before ; since the lower the 
rate the larger the principal necessary in order to yield 
a given income. Yet it is reasonable to suppose that 
non-employers, as a body, are stimulated to save more 
copiously by a high rate of interest than by a low one. 
To the multitudes of people who have no very definite 



Demand for Loans highly Variable. 275 

object to save for, except the general one of increasing 
their income, the difference between six per cent, and 
four per cent, may be decisive. The ever-present temp- 
tation to spend needs to be met by a strong counter- 
acting influence; and the higher the rate of interest on 
loans the stronger the motive for denying one's self the 
immediate enjoyment of one's savable income. 

We may therefore assume that when the market rate 
of interest rises, the supply of savings offering for loan 
will increase ; and that when interest falls, the reverse will 
happen. Changes in the supply of loanable savings tend, 
in turn, to react on the rate of interest, in the manner 
already familiar in the case of market prices. 

4. Variable Character of the Demand for Loans. — The 
objects for which loans may be desired are very numer- 
ous ; but they may be classed under two general heads : 
namely, commercial and non-commercial. Commercial 
loans are those made by business men with a view to 
profit. Non-commercial loans are those raised by gov- 
ernments, cities, and private individuals for special 
objects, such as the prosecution of a war, the construc- 
tion of water-works, the paving of streets, the building 
of houses, etc. The usual motive in borrowing of the 
latter kind is to spread the burden of the cost over a 
number of years, instead of taking it wholly out of the 
income of any one year. 

The call for non-commercial loans is subject to very 
sudden and extensive changes. The breaking out of a 
war between two great nations increases it enormously. 



276 Political Economy. 



The restoration of peace causes an equally sudden and 
extensive decrease of the demand. At times govern- 
ments and cities are seized with a feverish activity in 
the construction of public works ; at other times they 
are overtaken by a spirit of economy, and large expendi- 
tures by way of loan are avoided. These changes in the 
non-commercial demand for loans have striking effects 
on the rate of interest. 

Periods of large borrowing ought to be followed by 
periods of debt-paying on a large scale. But unfortu- 
nately, the payment of public debts is a practice very 
little in vogue. It calls for a degree of fortitude which 
governing bodies rarely possess. Obviously the payment 
of public debts, wherever it does occur, has an effect on 
the rate of interest exactly the reverse of that produced 
by the public borrowing. The bond-liolders whose bonds 
are paid off are under the necessity of finding new bor- 
rowers. This throws on the loan market a mass of old 
savings in addition to the amounts coming forward from 
current saving. 

The demand for commercial loans depends on the 
condition of business ; and this as we know is highly 
variable. When the product of industry contains the 
right proportion of each article; when the general level 
of prices accords well with the supply of currency, and 
when money wages are in such ratio to prices that profits 
are high, we have the situation known as "good times." 
At such a time there is a strong demand for commercial 
loans. Business men are able to see many openings for 



Interest High in Time of " Crisis. " 277 

the profitable use of savings, and accordingly are eager 
to extend their operations. Under the strong demand 
for loans, interest rises, and savings increase. Also, the 
banks extend their deposit loans and bank currency- 



increases. 



How long this situation may last, and why it must 
come to an end, are questions to which no very simple 
or satisfactory answer can be given. Probably no two 
cases work out quite alike, for there are many ways in 
which the highly complicated arrangements of civilized 
industry may become deranged. In the various exten- 
sions of old enterprises and starting of new ones, there 
is always a danger that the due proportion of commodity 
to commodity may not be preserved. There is a danger 
that wages may be raised to such a level as to leave no 
sufficient margin for profits. There is a danger that the 
advance in prices, resulting from the increase of bank- 
currency, may give rise to excessive bringing in of goods 
from other places, and that an outward drain of specie 
to pay for them may bring the banks into difficulties. 
There is, finally, and above all, a danger that something 
may occur to shake the general confidence, — especially 
the confidence of the banks and other lending institu- 
tions in the ability of business men to repay their loans 
at maturity. If any of these things happen, the pros- 
perous course of affairs Tisually comes to an end. 

1 Were it not for the artificial increase of loanable savings by the 
expansion of bank deposits, the rate of interest would rise higher at 
these seasons than it does. (See Chap. XV., § 7.) 



278 Political Economy. 



We have seen how largely busmess is conducted on 
credit. Now the great centres of credit are the banks. 
When manufacturers or wholesale merchants sell goods 
on credit, they usually get the notes or bills they take of 
the buyers discounted at the banks. With the money 
thus obtained they meet their own business obligations. 

If the banks begin to curtail their discounts, two im- 
portant results follow. The men who fail to get loans 
must at once cut down their business operations, — they 
may even have to suspend business altogether. Secondly, 
the volume of bank currency becomes reduced, and there 
is no longer enough currency to match the existing scale 
of prices. The sale of goods begins to slacken. In a 
word, the season of prosperity is over. 

5. Interest in Times of Commercial Crisis. — The extent 
and violence of the revulsion that follows depends on 
the circumstances of each case. Where the expansion 
of credit has been excessive, and there has been much 
speculative trading based upon it, many failures are sure 
to occur, and the revulsion may develop into a " panic." 
Where the over- use of credit has been less extreme, the 
immediate effects may not pass beyond a few failures, 
a general check to business activity, and a prevailing 
distress among business men. 

In either case the first effect a business revulsion has 
on the demand for loans is greatly to increase it. Busi- 
ness men, who have counted on their ordinary " collec- 
tions" for the means to meet their current obligations, 
suddenly find this resource failing them. They are com- 



Interest Low in "Dull Times." 279 

pelled to seek in borrowing the means of maintaining 
their solvency. Some men also, who have money enough 
to meet their present needs, are apt to become appre- 
hensive at such a time lest they may fail to get the means 
of meeting future obligations. They therefore try to 
borrow now enough to make the future secure. 

This new and more or less nervous demand for loans 
is very different from the ordinary commercial demand. 
The object in view is not to make profit, but to avert 
business ruin. The demand is accordingly intense. In 
time of panic it becomes headlong and unreasoning. 

While the demand for loans is thus more urgent than 
usual, the supply is usually much smaller than usual. 
The great lending institutions, having stretched their 
lending power to its utmost limit in the " flush " time 
just preceding the trouble, have little power to aid the 
business community with fresh loans. There is, therefore, 
a great dearth of loanable savings.^ 

- The law prohibits our National Banks from granting new loans 
whenever the reserve falls below the lawful ratio to the deposits 
[25 per cent, for city banks]. This restriction tends to aggravate 
the situation in time of crisis, because it forbids the banks to do the 
only thing that can restore confidence and save the business commu- 
nity from wide-spread ruin. In the crisis of 1873, the severest since 
the National Bank Act was adopted, the banks of New York com- 
bined their resources and broke the law, — granting new loans when 
their joint reserve was less than half of the legal requirement. The 
Bank of England, which is the centre of the English banking system, 
has learned by long experience that the best way to quiet a panic is 
to lend more freely than at ordinary times, — charging, however, high 
rates of interest. This course it follows freely, not being under any 
legal restriction as to its reserve, nor as to the rate of interest that 



280 Political Economy. 



There is no assignable limit to the rise of the rate of 
interest in such a situation as this. Men have been 
known to pay two per cent, a day for short loans at 
such times. 

When the crisis is past, the rate of interest suffers 
a sharp decline ; and in the period of depression that 
always follows a commercial revulsion, interest is low. 
It is a time when business men find it very difficult to 
turn savings to profitable account. It is a time of falling 
prices, owing to the diminished supply of money. (See 
Chapter XIII.) Sales of goods, especially sales on credit, 
are fewer than before the crisis ; and this means that 
there are fewer bills and notes offering to the banks for 
discount. Loanable savings accumulate on the hands 
of the great lenders. In order to attract borrowers, the 
rate of interest has to be placed very low, and even this 
usually fails of complete success. 

These periods of depression are in turn succeeded by a 
time of increased confidence and reviving credit. Prices 
again come into accord with the supply of money, and 
money wages with both. A promise of reasonable profits 
again presents itself to those who have managing skill 

may lawfully be charged for loans. The high rate checks merely 
nervous borrowing. The attempt so commonly made in old times, 
and still made in some of our States, to keep down the rate of interest 
by law, has never had the effect of protecting borrowers. The result 
is always to make the rate higher in time of trouble than it would be 
if no legal limit existed ; for the lender charges more on account of 
the risk he runs in violating the law. All such laws are foolish and 
injurious, — as foolish and injurious as the kindred attempt sometimes 
made in former ages, to regulate prices by law. 



Interest and Wages. 281 

and capital. The revival of industry means an increased 
demand for loans and a rise of the rate of interest. It 
remains high until a new revulsion overtakes the business 
world. 

We thus see that the rate of interest moves in cycles, 
following pretty closely the profits of employers. When 
profits are high, interest is high also. When profits fall 
off, interest falls too. 

6. Significance of the Prevailing Rate of Interest. — 
The fact that the rate of interest follows so closely the 
ups and downs of business profits, suggests that there 
is a connection between the ordinary rate of interest in 
a country and the general condition of its industry. 
The ordinary demand for loans is a good index of the 
ordinary rate of profits. If the demand be strong enough 
to sustain a high rate, we may safely infer that employ- 
ers are making high profits. We can also infer that, in 
comparison with the productiveness of labor, real wages 
are low in the country.^ 

This does not mean that a high rate of interest is, in 
itself, a cause of high profits or of low wages. Wages 
depend on the volume of savings offered for labor, — no 
matter by whom offered nor at what rates of interest 
some part may have been borrowed. Profits, in turn, 
are the excess of product over wages, and this also is 
uninfluenced by the rate of interest. A high rate of 
interest is merely a sign and a result of the fact that 

' 1 It must be remembered that a rise of prices, without a corre- 
sponding rise of money wages, means a decline of real wages. 



282 Political Economy. 



savings are small in proportion to the product of indus- 
try. Further, it tells us nothing as to the volume of 
savings, nor as to the productiveness of labor in the 
absolute selise. Interest may be high where industry is 
highly productive, because the spirit of saving is weak 
among those who have savable income. It may also be 
high where the productiveness of labor is low, because 
however strong the inclination to save, the amount of 
savable income is small. In the one case high interest 
and high wages prevail side by side ; in the other case 
high interest and low wages, — wages being spoken of 
in the absolute sense in both cases. 

The rate of interest, then, tells us nothing about the 
actual level of wages. But it does convey an intima- 
tion as to one of the factors on which wages depend, — 
namely, the strength of the saving spirit among the 
owners of wealth. Other things remaining unchanged, 
a decline of the ordinary rate of interest in a country 
implies a rise of wages ; for it implies a greater readiness 
to save on the part of those who have savable income. 
The rise of wages and the decline of interest are both 
effects of the same cause ; namely, the increase of saving. 
Other things being equal, then, a low customary rate of 
interest indicates a condition of things more favorable 
to the laborers than a high customary rate does. For 
employers the indication is reversed. Though they pay 
low rates for what they borrow, the situation implies 
that they are making low gains on all the savings they 
invest, — their own as well as what they borrow. 



Interest and the Supply of Money. 283 

7. The Rate of Interest does not Depend on the Supply 
of Money. — It is common to suppose that a high rate of 
interest denotes a scarcity of money, and a low rate an 
abundance of it. This view is entirely erroneous, as there 
is no necessary connection between the rate of interest 
and the quantity of money in the country. 

It is true, no doubt, that savings offering for loan are 
always in the form of money, but it is not true that all 
money is in the form of savings offering for loan. The 
money in general circulation does not help anybody to 
borrow, for the holders have no thought of lending it. 
It is only the money actually offering for loan that tells 
on the rate of interest. 

If the bankers and other lenders should spend their 
money, instead of offering it for loan, there would be no 
less money in the country than there was before ; but 
interest would rise very much all the same. In fact it 
would be an advantage if we could drop money out of 
view in this matter, and regard the offer of loans simply 
as the offer of savings in the form most convenient to 
borrowers. The newspaper phrase " money market," in 
the sense of loan market, is a standing misuse of words. 
The true money market is where money is actually sold, 
that is, where it is exchanged for goods, — not where 
loans are made in money to be repaid in the same article. 
If money did not exist, there would still be loaning of 
savings, and the rate of interest would depend on the 
same principles as at present. 

The rate of interest, then, is no indication of the 



284 Political Economy. 

quantity of money in the country. It only indicates 
whether a large or a small proportion of the existing 
stock is offering for loan. Accordingly increase of cur- 
rency does not lower the rate of interest. If the currency 
were increased a hundred-fold, there would be a hundred 
times more dollars offering for loan no doubt, but the 
number of dollars needed by borrowers would be a hun- 
dred times greater also. As soon as prices and money- 
wages became adjusted to the new volume of currency, 
each borrower would need a hundred dollars to do the 
work previously done by one dollar. Loanable savings, 
in the sense of means to carry on business, would be no 
greater than before the increase of currency. 

Looking at the case in another way, both loan and 
repayment consist of money. If dollars be cheapened 
for borrowing, they are also cheapened for repaying loans 
and for paying interest. A man can as easily pay five 
dollars for the use of a hundred when dollars are dollars, 
as when each dollar is only worth a cent. Both terms 
of the ratio are affected alike whenever dollars are cheap- 
ened by increase of currency. 

A high rate of interest then is no sign of a scarcity of 
money, nor is a low rate a sign that the currency is large 
in amount. The high interest that prevails in a com- 
mercial crisis is due to the scarcity of loanable savings, 
not to the lack of money. The low rate that prevails 
during a depression is due to lack of demand for savings, 
not to any excess of money. In fact money never seems 
scarcer to the mass of men than in times of depression, 
when interest is at the lowest point. 



Interest and the Supply of Money. 285 

An increase or decrease of the currency may tempo- 
rarily affect the rate of interest, if it be unequally dis- 
tributed between the money offering for loan and the 
money in ordinary circulation. For example, the impor- 
tation of money from abroad always lowers the rate of 
interest for the time, but this is because the new money 
is imported by the bankers and brokers, and consequently 
presents itself, in the first instance, as an addition to the 
loanable savings. Every dollar of specie imported adds 
several dollars to the lending power of the banks. Simi- 
larly a drain of coin for exportation raises the rate of 
interest, because every dollar exported lessens by sev- 
eral dollars the ability of the banks to grant loans. But 
the effect in each case is only temporary. As soon as 
the increase or diminution has time to distribute itself 
equally over the whole volume of the currency, interest 
returns to its old rate. 

If money be brought into a country in the pockets of 
travellers and emigrants, it has no tendency to lower the 
rate of interest even temporarily. It adds nothing to 
the loanable savings of the country. In fact, it would 
tend to raise the rate of interest until such time as a 
due proportion of the increase of currency should reach 
the reserves of the banks ; for, by raising prices, it would 
stimulate borrowing without adding to the volume of 
loanable savings. 



CHAPTEE XXIII. 

PRODUCTIVENESS OF NATURAL AGENTS. — ECONOMIC 

RENT. 

1. Natural Advantages for Production. — We have al- 
ready had occasion to note the fact that the natural 
advantages for the production of any given commodity 
are not everywhere equally good. In the production of 
coal, for example, one mine may have its deposits nearer 
to the surface, or in thicker seams, or of better quality 
than another. In the production of wheat, one piece of 
ground may have better qualities of soil, a better situa- 
tion, or easier access to fertilizers than another; one 
region may have a more favorable climate than another. 
In the manufacture of paper, one mill-site may have a 
more convenient water supply, or easier access to fuel 
and other materials, than another. In all kinds of pro- 
duction, nearness to the market is an advantage. And 
so on. 

Now these differences in natural agents have an import- 
ant effect on the productiveness of the labor applied to 
each. Those who have possession of the better natural 
facilities in each industry, are obviously in a position to 
obtain greater results for a given outlay of lal)or and wait- 
ing than those who carry on the industry under less fa- 
vorable conditions. If those who work under the relative 
286 



Nature of Economic Bent. 287 

disadvantage are able to earn ordinary wages and profits, 
the others must be getting something more than this. 

2. Economic Rent. — We have here a case of what is 
called Economic Eent. The term is applied to every 
excess of product or of return that is due to the posses- 
sion of superior natural agents, or of facilities that are 
not open to everybody. 

In studying this subject the student must dismiss the 
idea that the word rent, as used in political economy, 
necessarily means a sum paid for the use of anything. 
The rent of which we speak here has no necessary refer- 
ence to payments between men. It means simply an 
excess of product or of return that is due to the use of 
a natural advantage not open, to all producers. 

It makes no difference whether the person using the 
superior agent hires it of another or owns it himself. If 
he hires it of another, the rent may be claimed by that 
other. If he owns it himself, the rent is his own. In 
either case, the term denotes simply the extra product 
or income that is due to the natural advantage. 

Again we use the word rent, in common speech, to 
denote payments for the use of property of any kind. 
We speak of the rent of a house, or of an office, or of 
a piano. But payments of this kind are never wholly 
economic rent. They are largely, and in cases like the 
rent of a piano, wholly compensation for outlay expended 
in getting the hired article produced. Eeal rent, when 
it takes the form of a payment, must be for the use of a 
natural agent such as land, mines, water-power, etc. And 



288 Political Economy. 

even in the case of natural agents, the payments called 
rent are seldom wholly rent in the economic sense. If, 
for example, a man hires land that has been improved, or 
a mine that is already in operation, a part of the pay- 
ment, perhaps the greater part of it, is merely a return 
for the outlay made in preparing the land or the mine for 
use. Economic rent is not a compensation for labor and 
waiting. It has reference to the inherent qualities of 
the natural agent that yields it, regarded in its original 
or unimproved condition. 

At the same time it is evident that the advantages of 
a particular spot of ground may depend greatly on the 
state of its surroundings; and these may be indefinitely 
improved by human exertions. Where the owner of land 
or any other natural agent gets the benefit of other 
men's outlay in this way, the gain to him is as if the 
whole advantage had been conferred by nature. To him, 
therefore, though not to the community as a whole, the 
results of the improvement are in the nature of rent. 
When, for example, a new railway is built, bringing 
cheap transportation to a region hitherto cut off" from 
the great markets, the increased letting value of the 
lands may be regarded as rent for the land-owners, — 
provided, of course, that the road has been built without 
corresponding expense to them. 

3. No-Rent Stage of Population, — Mere diff'erences in 
the quality of natural agents of any kind would not 
of themselves give rise to rent. In fact, we shall pres- 
ently see that any class of natural agents might yield 



No-Rcnt Stage of Poiyulation. 289 

rent even if they were all equal in point of advantages. 
The true cause of rent, in any class of these agents, is 
scarcity of them in comparison with the demand for 
the product obtained by means of them. This demand 
depends primarily on population. 

Perhaps the easiest way of getting clear ideas regard- 
ing rent is to consider what happens everywhere as jDopu- 
lation increases. Let us take the production of food as 
an example. We may assume that the people of a coun- 
try are interested in obtaining their needful supply of 
food in the easiest way. While population is still small 
in proportion to the area of land, there is a wide option 
as to the portions to be tilled. We may assume that the 
farmers of the community can discern the lands that are 
most favorable for their purpose, and that these will be 
cultivated in preference to poorer lands. 

While there are still lands enough and to spare of the 
best grade, the value of food of any kind will correspond 
to the cost of producing it on these lands. That is to 
say, its value will be such as to afford ordinary wages 
and profits for those who raise it, but nothing over as 
rent for the land. For if the value were high enough , 
to yield a rent for the cultivated area, those who own 
other lands just as good would quickly bring theirs into 
use, and too much food would be raised. We have these 
two points to start with : first, that while population is 
small, the value of food is governed by the cost of raising 
it on the most advantageous lands; and, secondly, no 
agricultural land affords a rent. 



290 Political Economy. 



4. Beginnings of Rent. — At a comparatively early 
stage in the growth of a commimity, there comes a time 
when the most advantageous portions of the soil are no 
longer sufficient to supply the wants of the whole popu- 
lation. When that point is reached and passed, two new 
facts appear. The first is that the value of food begins 
to stand at a higher level than before : the old price does 
not induce farmers to raise enough for all. The value 
rises until farmers find it profitable to till less advan- 
tageous lands than formerly, and it stays permanently 
higher than before. If it did not, the less advantageous 
lands would not be cultivated, and the needful addition 
to the supply of food would not be raised. Higher than 
is sufficient to afford ordinary wages and profits for rais- 
ing the needful addition the value will not go, — at least 
so as to stay. If it did, more than enough of these 
lands would be cultivated and too much food would be 
raised. We can therefore say that the natural value of 
food will now be that which affords ordinary wages and 
profits for raising it on the less advantageous lands, 
with nothing over as rent for these lands. This is the 
first fact. 

The second is, that those who till the best lands are 
now able to sell their crops for more than enough to 
afford them ordinary wages and profits. It is no harder 
than before to raise food from these lands ; yet each 
bushel of the crop sells for more than before. The extra 
gain thus accruing from the higher natural value of the 
crop is rent. If the owners of these lands do not them- 



Growth of Bent. 291 



selves till tliem, they may exact from the cultivators an 
annual payment roughly equal to this extra profit. 

5. Extension of the Rent Area. — So long as there is 
enough land of the second grade in point of advantages 
to supply the whole demand for food, the necessary addi- 
tions to the crop can be obtained without higher cost, the 
natural value of food will remain steady, and no lands of 
the second grade will afford rent. But when population 
grows to such a point that these lands no longer suffice, 
the supply of food again begins to be deficient, the value 
rises, and cultivation is extended to lands of the next 
inferior grade in point of advantages. In this new situ- 
ation, the natural value will be that which affords ordi- 
nary wages and profits for cultivating the third grade of 
land, with nothing over for rent. This higher value 
gives rise to a further extra profit, or rent, from the 
cultivation of the best lands. It also makes the culti- 
vation of the land of the second grade yield more than 
ordinary wages and profits : these lands also now afford 
a rent. 

The rent of the better lands may be- looked at in two 
different ways. Comparing the cultivation of rent-yield- 
ing land with all other ways of investing savings, we 
may regard rent simply as extra profit, due to the fact 
that the value of the product is higher than it needs 
to be in order to afford ordinary wages and profits to 
the producers using the better natural agents. This is 
the simpler view. Secondly, we may regard it as extra 
product over and above the amount obtainable from the 



292 Political Economy. 



least advantageous lands, by an equal outlay of labor. 
The two views come to the same result, since the culti- 
vation of the poorest lands must yield ordinary profits. 
If the labor that produces one hundred bushels from the 
best lands produces only eighty bushels from the least 
advantageous lands in use, then twenty bushels in every 
one hundred produced from the best lands are economic 
rent. The extra profit coincides with the value of this 
extra product, or twenty bushels. 

Every time that cultivation has to be extended to less 
productive lands than those already in use, the extra 
profit from cultivating the better lands rises in two 
ways. The excess of product over the least productive 
land becomes greater than before ; and, secondly, the 
value of each bushel must have become higher, or cul- 
tivation would not have been extended. Money rents, 
therefore, rise more rapidly than rent in kind. 

6. General Principles of Rent. — Such is the nature 
and origin of economic rent. From a consideration of 
the facts in the case, we are enabled to lay down the 
following general principles : 

{a) The poorest lands in cultivation at any time yield 
no rent, so long ad there are other lands of the same 
quality lying unused. The latent competition of the 
unused portion keeps rent down to zero on the portions 
that happen to be in use. 

(&) The natural value of food corresponds to the cost 
of procuring the most costly part of the whole needful 
supply, — that is to say, the portion raised on the poorest 
lands in cultivation. 



Differences in Land. 293 

(c) All lands superior to the poorest yield a rent 
proportioned to their superiority. This superiority is 
measured, in the case of any given land, by the difference 
between the cost of its crop and the cost of producing an 
equal quantity from the poorest land in cultivation. 

7. Meaning of "best," "poorest," etc., as applied to 
Lands. — It is necessary to bear in mind that the superi- 
ority of one tract of land over another, as a source of 
supply for a given market, has reference to all the points 
of difference in the case. It would be a great mistake to 
think only of differences in fertility of soil, or to suppose 
that rent is ever a mere question of bushels to the acre. 
The superiority of the better land over the poorest may 
consist in easier access to fertilizers, greater nearness to 
the market, cheaper means of transportation, or in any 
other circumstance that affects the comparative cost of 
the product obtained from each, when brought to the 
place of consumption. The inferior land may be in itself 
more fertile than the other, but so much farther from 
the place where the food is needed that its superior fer- 
tility is more than counterbalanced by its disadvantage- 
ous position. Eent has reference to the whole advantage, 
and this is nearly always a compound result, or balance 
of many points of difference. The words "best," "poor- 
est," etc., applied to lands in the discussion of rent, mean 
best or poorest taking all the circumstances into account. 

Again the relative advantages of different lands change 
with changes in agricultural knowledge, improved imple- 
ments, better facilities for transportation, etc. The lands 



294 Political Economy. 

that are best at one stage in a people's history may be 
far from being thought best at another stage. Lands 
are good or poor, in relation to rent, according as they are 
good or poor for the people who are to use them. 

8. The Law of Diminishing Returns. — Our view of 
economic rent would be very incomplete if we left out 
of sight an important principle, not yet touched on, 
relative to the use of natural agents. The amount of 
product that may be obtained from any given supply 
or extent of these agents is not subject to any fixed or 
definite limit. The modes of using them are such that 
a greater or a less quantity of labor can be applied to 
them at will. The product may be increased by addi- 
tional labor at any time. But here we come on the 
so-called law of diminishing returns. The increase of 
product is usually found not to be in proportion to the 
increase of labor. 

The principle may be conveniently illustrated in the 
case of farming. In any given condition of the agricult- 
ural arts, the amount of food that may be raised from 
a given piece of land, has no fixed or inflexible limit, but 
depends on the amount of care and skill bestowed on 
the cultivation of it. It has been well said that no man 
has ever yet developed the full productive capacity of 
a single acre of ground. Whatever the crop already 
obtained, a larger crop may be obtained another year by 
more assiduous cultivation. The soil may always be more 
completely pulverized or further enriched ; seeds may be 
more carefully selected or more favorably planted ; more 



The Law of Diminishing Behirns. 295 

care may' be given to weeding, watering, and otherwise 
nursing tlie growing plants, etc. Every such additional 
exertion causes the yield to be more copious in quantity 
or better in quality than before. 

All this is quite true, and is most fortunate for the 
human family. But the fact remains that high cultiva- 
tion is a costly method of adding to the food supply. 
The same labor expended in looser cultivation of a larger 
area would procure a much larger quantity of food. 

In the application of labor to any given piece of land, 
there is a point of maximum return in proportion to 
labor expended. This point is found in a comparatively 
rough and hasty cultivation of it. Once the point of 
greatest proportional yield is reached, any additional 
expenditure of labor is met by the law of diminishing 
returns. Further, the higher the pressure already put 
upon the soil, the smaller the addition to the crop by 
any new application of labor. 

These are principles applicable to all the extractive 
industries. The point of maximum return is, of course, 
a matter to be settled by practical experience in each 
case. It cannot be known by any general or abstract 
rule. Further, it is likely to vary with every new dis- 
covery or improvement in the mode of using natural 
agents of any kind. But for every natural agent, and 
for every state of the productive arts, there is such a 
point; and it is nearly always found to lie on the side 
of working it at a comparatively low pressure, rather 
than a high one. 



296 Political Economy. 

Up to the point of diminishing returns it is obviously 
a saving of labor to draw needful food and materials from 
the agents already in use at any time, before extending 
the area of operations. We may therefore assume that, 
when new lands or new mines are brought into use, 
being naturally no better than the old ones, the point 
of diminishing returns has been reached upon those 
already in use. 

Conversely, while there are still new lands open to 
cultivation, as good in all respects as the old, we may 
assume that additional supplies of food will ordinarily be 
obtained by extending the area of cultivation rather than 
by applying additional labor, with diminishing returns, 
to the area already in use. 

When this is no longer possible, when all the most 
advantageous lands are already in use, there are obviously 
two ways of obtaining needful additions to the food sup- 
ply, — the one by bringing less advantageous lands into 
use, the other by higher cultivation of the old lands. 
In practice, both methods are applied simultaneously. 
But in order that men shall raise additional supplies in 
either way, the value of food must rise sufficiently to 
make the raising of the increase a source of ordinary 
profit. 

But, if the raising of the addition yields ordinary 
profits, it is clear that, taken as a whole, the crop raised 
on the old lands must yield more than the ordinary rate 
of profit. This extra profit is economic rent. 

9. Rent not Due Solely to Differences in Lands. — We 



Rent due to Scarcity of Natural Agents. 297 

now see that the existence of economic rent does not 
depend on the differences between lands in point of 
advantage. These differences simply give rise to one 
form or phase of rent ; it may be that, in the long run, 
they will only cause differences in rent. Even if all 
lands were equal in point of advantage, rent would arise 
as soon as needful additions to the supply of food could 
be obtained only by cultivating some portions of the 
whole beyond the point of maximum return. The value 
of food would then have to be permanently higher than 
it was while increase could still be obtained by extend- 
ing the area of cultivation, — enough higher to make the 
raising of the addition profitable in spite of its greater 
cost. The value of the whole crop would now follow 
the cost of the addition. 

We must suppose that, at the old value, farming 
yielded ordinary profits. At the new value it does more 
than this, and the excess is economic rent. This point 
may be made more clear if we keep the increase distinct 
in our minds from the old amount of crop. Of course it 
is optional with individual farmers whether to raise the 
increase or not. If for any reason some of them should 
simply go on in the old way, raising only the old quan- 
tity from their lands, they would have the benefit of 
the higher value just the same. The addition to their 
returns would be economic rent. We may assume, how- 
ever, that the opportunity to employ additional labor, 
with the prospect of ordinary profits on the additional 
outlay, would be generally taken advantage of by farmers. 



298 Political Economy. 



This opportunity would be as good as those offered by 
the common run of industries in the country. It would 
simply yield no excess of profit. 

10. Rent and the Price of Food — If all the farming 
lands in the United States were cultivated by tenant- 
farmers, each paying a full rent for his land, would the 
rents thus paid cause the price of food to be higher than 
it now is ? In countries where the farms are held at a 
rent, would the price of food l^e lowered if the landlords 
should make a present of the farms to the tenants ? 

These are questions which may seem, at first sight, to 
require an affirmative answer. But anybody who con- 
siders carefully the nature of economic rent ought to 
have no difficulty in seeing that both questions must 
be answered in the negative. 

Where the food supply is drawn from lands differing 
in point of advantages, we have seen that the cost of 
procuring it from the least advantageous lands fixes the 
natviral value of the whole supply. We have also seen 
that the least advantageous land yields no rent. It 
follows that rents have nothing to do with settling the 
value or the price of food. If all rents were remitted 
to the tillers of the better lands, this would not alter in 
the least the cost of procuring food from the poorest 
lands. If the value should fall, this portion of the sup- 
ply could no longer be ra.ised with a profit, and conse- 
quently would cease to be raised at all. So that if the 
price should fall, it would have to rise again. The ten- 
ants of the better lands, whose rents are remitted, would 



Rents not a Cause of High Prices. 299 

find no greater difficulty than before in disposing of their 
whole crop at the old price. To offer it for less because 
now they " could afford " to do so, would simply be to 
hand over to sharper men gains that were fairly their 
own. We may safely hold that they would make no 
such mistake, and that even if they did, the lowered 
price would not last many days. 

Eent as a payment to the owner of a natural agent by 
the employer using it, may well enough be regarded as 
a part of the cost to the latter of the product he obtains 
from it : the more he pays in any given case the less his 
profit. But this is only half of the case. The reason 
why the employer pays rent is the fact that he gets the 
use of a corresponding advantage. For the special item 
of rent in his outlay, he expects to have an equivalent 
special item in his return, — namely, tlie economic rent 
yielded by the natural agent of which he has the use. 

Of the true cost of production that fixes the value of 
the commodity, it ought to be clear that rent is no part. 
The cost to which the value must conform is that of the 
last needful addition to the supply. The last needful 
addition, whether obtained by extending cultivation to 
poorer lands or by higher cultivation of the lands already 
in use, is obtained free of rent. We conclude, then, that 
even if all rents, in the sense of payments, were remitted, 
economic rent would still continue to accrue, and would 
simply remain, as extra profit, in the pockets of the em- 
ployers having the use of the superior natural agents. 

We see then that, instead of rent causing the product 



300 Political Economy. 

to have a high value, it is ratlier the high value that 
makes the rent possible. The high value and the rent 
that goes with it are both due to the scarcity of the 
natural agent (or of the superior portions of it) in com- 
parison with the demand for its product. The strong 
demand keeps the value of the product above the point 
that would correspond to the cost of producing it under 
the most favorable conditions : that is to say, the cost 
of obtaining it from the most productive sources within 
reach, by applying labor to them up to, but not beyond, 
the point of highest proportional return. As soon as 
value is such that prodiiction from any natural agent 
can be pushed beyond this point, with ordinary profit, 
that natural agent has begun to yield rent. So that 
rent follows value, not value rent.^ 

I There is, however, one form of rent of which this is hardly true, 
at least to the full extent. I refer to the rent of land used for manu- 
facturing purposes in and about cities. To a considerable extent 
these rents are due, not to any peculiar advantage possessed by the 
land, in and of itself, for the purposes to which it is applied, but to 
the fact that it could be let at the same rent for other purposes. 
Many kinds of manufacture can hardly be carried on, at least on the 
modern scale, at a distance from the great centres of population and 
commerce. The advantage lies as much in the mere aggregation of 
men as in the natural fitness of the place. But the aggregation of men 
causes the land occupied by the necessary buildings and the dwellings 
of the workmen, to be at a scarcity value and to command a consider- 
able rent. For this rent, so far as it is unavoidable, the employer and 
his laborers must be compensated in the value of their product. Of 
course any rent of manufacturing sites that is due to special natural 
advantage for the purpose, follows the ordinary rule, — being offset by 
the extra return which the advantage brings. 



Iviprovements Tend to Lessen Rents. 301 

11. Improvements in Farming Lessen Rents. — Eent, as 
we have seen, depends immediately on the value of farm 
produce. Every rise of natural value implies a rise of 
rents. Eailways lessen rents in the crowded portions 
of the world, by supplying the inhabitants with cheaper 
food. Any other agency that tends to lower the value 
of farm produce has the same tendency to reduce rent. 

Of course, therefore, all agricultural improvements 
have this tendency. They lessen the cost of food, just 
as inventions in manufacturing lessen the cost of manu- 
factured goods. But their action, especially in its bearing 
on rent, is less simple than that of improvements in 
manufacturing. They are peculiar, in that they affect 
the value of food, and thereby the rents of the better 
lands, not in proportion to their effect on agriculture as 
a whole, but in proportion to their effect on the cost of 
that part of the necessary food supply, which is most 
difficult to procure. 

Agricultural improvements are of two general classes. 
Those of one class save labor in farming, but add nothing 
to the crop ; for example, the gang-plough or the reaping- 
machine. Those of the other class add to the productive- 
ness of the land, but without lessening the labor required 
for cultivating a given area , for example, the introduc- 
tion of rotation of crops or the discovery of new fertil- 
izers. Labor-saving machines tend to lower the value of 
food simply in the ratio in which they lessen the . cost 
of raising it on the least advantageous lands in use. 
Improvements of the second kind have this effect also; 



302 Political Economy. 



but they may go farther and make the cultivation of 
the poorest lands needless ^ By increasing the crop from 
a given area, they may make a smaller area sufficient. 
Any improvement which should do this would lower the 
value of food, and consequently rent, in two distinct 
ways : first, by making a naturally better land the regu- 
lator of cost ; secondly, by increasing the productiveness 
of this land. 

By way of illustration, let us suppose the supply of 
food for a community is drawn from three grades of land; 
and that the quantity of labor which produces ten bush- 
els from the poorest grade, produces twelve and fifteen 
bushels from the other two grades respectively. Of 
course, the value must be such as to make ten bushels 
sufficient to afford ordinary wages and profits for this 
labor. That being so, the price of two bushels in every 
twelve, or one-sixth of the crop, raised on the second grade 
of land is rent; and the same of every third bushel raised 
on the best grade. If the price be one dollar a bushel, 
there is a rent of two dollars for every twelve bushels 
raised on the second grade, and five dollars for every 
fifteen bushels raised on the best grade. 

If now a labor-saving improvement lessens by one-fifth 
the outlay required for raising these quantities, it will 
lower the price to eighty cents a bushel ; the money rent 
of the second grade will fall to a dollar and sixty cents 
for every twelve bushels produced from it ; and that of 
the best grade to four dollars for every fifteen bushels 
produced from it. The saving in outlay is the same for 



Tmproveme7its Tend to Lessen Bents. 303 

all three grades (say two dollars) ; but the fall of price 
affects the better lands more heavily than the poorest, 
because their crop is greater. 

If, instead of a labor-saving improvement, a new fer- 
tilizer be discovered that increases by say one-third the 
productiveness of labor applied to agriculture, the result 
may be to make the cultivation of the poorest grade no 
longer necessary. In that case the value will fall to cor- 
respond with the cost of producing food, with the aid of 
the new fertilizer, from the second grade of land.^ The 
labor that previously raised twelve bushels on this land 
will now raise sixteen ; but the sixteen bushels will have 
the same price that ten had previously ; namely $10, or 
62 J cents a bushel. This leaves nothing over as rent. 
The same quantity of labor will now raise twenty bush- 
els on the best land ; but the price of sixteen bushels 
will be required to pay ordinary wages and profits, leav- 
ing only the new reduced price of four bushels for rent. 
The rent of the second grade disappears entirely, and 
that of the best lands is reduced to one-half of the old 
amount, namely $2.50, for the given outlay of labor. 

It is well to note that the fall of rent in this case is 
not due to the fact that the poorest land ceases to be 
cultivated. The fall of rent and the abandonment of the 
poorest lands are both effects of the same cause, namely, 
the decreased value of food. The same effects would 
follow from an equal fall in value caused by cheapened 

1 Strictly this result requires that not all even of the second grade 
shall be needed for cultivation. 



304 Political Economy. 

importation of food from other regions. In fact, it must 
be said of all strictly agricultural improvements that 
they have seldom had in practice the effect of actually 
lowering the value of farm products. The art of tillage 
has undoubtedly made progress ; but in comparison with 
manufacturing and transportation the progress has been 
very slow. The improvements in farming would not, 
of themselves, have done more than to retard the rise of 
rents. The great and striking effects on the value of farm 
products, and consequently on rents, have been brought 
about by the wonderful cheapening of transportation. 

12. Railways and Rent. — - The application of steam to 
transportation has kept down the value of food in two 
ways : first, by enabling people to move away easily and 
cheaply from the crowded parts of the world to regions 
where population is sparse ; secondly, by enabling those 
who remain in the thickly peopled parts, to draw their 
food and materials from distant places at slight cost. 
The first of these effects has been spoken of already. 
The second is equally important. 

The great abundance of fertile land in America would 
not keep the value of farm products down in all parts 
even of our country, if it were not possible to carry the 
product with little labor from the western farms to the 
crowded districts of the centre and East. Farm products 
are bulky and heavy. Without powerful means of trans- 
portation they could not be moved far except at great 
cost. 

Tliis was "the ordinary case in old times. Before the 



Railways Keep Down Rents. 305 

introduction of canals and railways, it was costly and 
difficult to carry things from one place to another, except 
where transportation by sea or river was possible. To 
transport wheat even a hundred miles, by means of 
draught animals, added enormously to its cost. Conse- 
quently, in a region of dense population, farming lands 
might yield a considerable rent, even though abundant 
land could be obtained rent free in regions comparatively 
near. . - 

But the improvements in transportation made in the 
last fifty years have changed all this. It is now possible 
to carry food and other products of labor long distances 
at slight cost. A barrel of flour is now carried one 
thousand miles by land for the sum of one dollar. The 
application of steam to transportation, both by land and 
by water, has in effect brought the most distant places 
very close together for purposes of exchange.^ 

The effect on agricultural rents, especially in the Old 
World, has been very marked. Wheat may now be 
carried from Dakota to London for less than it cost 
formerly to carry it from the centre of England. Agri- 
cultural rents have therefore declined very much in the 
British Islands, and are likely to decline still farther. 
Even in the United States the cheapening of transport- 
ation has produced effects hardly less striking on the 
value of lands in the older States. Many lands that 

1 Mr. Edward Atkinson computes that the labor of one man is 
now sufficient to transport the wheat supply for a thousand persons 
from Dakota to New York, a distance of 1700 miles. — Distribution of 
Products, page 286, 



306 Political Economy. 

formerly yielded a good, if not a bountiful, return to 
savings expended upon them, have now quite fallen out 
of cultivation. The opening up of the great West has so 
lowered the value of farm produce that there is little 
profit to be made now in ordinary farming in the East. 

The present condition of things will last until the 
virgin soils of the West and North-west have been so far 
exhausted, that the manuring and other burdensome 
processes necessary in the older countries have to be 
resorted to. When that time comes rents will begin 
to rise again. 

It remains only to add the obvious remark that a 
decline in the value of farm products caused by cheap- 
ened importation, is much more disastrous to agricultural 
rent than a decline caused by home improvements in 
agriculture. In the latter case, the better lands have at 
least the benefit of the improvement as a partial offset 
to the fall in value ; but in the former case the fall in 
value is wholly at the expense of the landlords. Thus, 
if the fall to eighty cents, spoken of on page 302, were 
caused by cheapened importation, the rent of the best 
land would fall to two dollars instead of four. 

13. Rent of Building Lands. — City rents are more con- 
spicuous in this country than agricultural rents. The 
modern tendency of population is toward the towns, and 
the growth of building rents is correspondingly rapid. 
The sum paid for the use of a building in a city consists 
of two parts. One part is simply a payment for the 
use of the building itself, which is a product of labor. 



Rent of City Lands. 307 

The other part is for the use of the land on which the 
building stands. The first is mainly replacement of sav- 
ings with interest thereon ; the second is true rent. 

The rent of city lots is determined by the same general 
principles as the rent of agricultural lands. The chief 
difference is that here we start usually from a condition 
in which the land is already yielding rent for agri- 
cultural purposes. Of course, land will not be turned 
into building lots until there is a prospect of its yielding 
somewhat better returns than it yields as farming land. 

The new building lots in the outskirts of a city may 
be regarded as having their rent determined roughly by 
the agricultural rent of the land. As quickly as there is 
a gain to be made by converting farming land into build- 
ing lots, we may assume that the conversion will ordi- 
narily be made. At the meeting line of the two kinds 
the difference of rents must always be slight. 

Building lots nearer to the centre of the town have of 
course many advantages for business purposes over these 
newly-made lots. The economic rent of each more central 
lot is equal to the rent of an equal area in the outskirts, 
plus the equivalent of its special advantages over the lat- 
ter. Since the rent of newly converted lots must usually 
be small, we may say for brevity that the rent of central 
lots is a sum equivalent to their superiority, for the uses 
to which they are put, over equal areas in the outskirts. 

This is a question of business advantage mainly. 
Other things being equal, the merchant who has his 
store in the crowded thoroughfare can sell much more 



308 Political Economy. 



than tlie one who has his store in a remote corner of the 
town. Without charging higher prices, he can make 
mucli larger profits. 

If he does not own the ground he occupies, the owner 
may exact as rent the full equivalent, in the view of busi- 
ness men, of this special advantage. The competition of 
business men for the possession of the best sites may safe- 
ly be counted on to enable him to do this. Thus we have 
for the rent of business sites in cities the same rule of 
extra profits that we found to apply in agricultural rents. 

14. Rent of City Lots used for Dwellings. — In the 
case of city lots used as sites for dwellings, we cannot 
lay down any so definite measure of rent as in the case 
of business sites. Of course, lots that possess special 
advantages for business purposes are not likely to be let 
for residences at a lower rent than could be obtained for 
them, if applied to the other use. Usually, however, 
dwellings and business edifices occupy separate quarters 
of the city ; so that the rule of extra profit can hardly be 
applied universally as the regulator of city rents. 

In the case of lands adapted, or held to be adapted, 
for dwellings only, rent depends on the demand. The 
question is simply how much extra the people are will- 
ing to pay for the privilege of living in the most de- 
sirable streets or neighborhoods. Here, as in the case 
of lots used for business purposes, we take the lands in 
the outskirts of the city as our starting-point. Those 
lands may be hired, as sites for dwellings, for about the 
same rent as they yield in agriculture. The better 



Rent of City Lands. 309 

sites will have their excess of rent above these, set by 
the general estimate of the social and other advantages 
of living upon them. If there are a hundred of the best 
sites, the rent of them will be set at such an amount 
as a hundred persons, and only a hundred, can be found 
to pay. If later the number of persons willing to pay 
this amount of rent should increase, then the rent of 
these lots will rise to a point at which only one hundred 
applicants for them can be found. 

Cities are becoming rather centres of trade than places 
of residence. The railways enable men whose work lies 
in the city, to have their homes miles away in the coun- 
try. This fact checks the rise of house-rent in the cities. 

15. The Price of Land. — Land that yields rent, or is 
expected to do so, may evidently be bought as a mode of 
investing savings. The price, through the competition 
of buyers, tends to be equal to the present worth of the 
expected rent. That is to say, it tends to be such a 
sum as puts the purchase on a level, in the opinion 
of investors, with other modes of getting interest on' 
savings. The price of any piece of ground depends, 
therefore, on two things : namely, the amount of rent 
it is expected to yield ; and, secondly, the prevailing 
rate of interest on other investments. The lower the 
rate of interest the higher the price 'of land is. 

Since the future rent is always uncertain, dealings in 
land are apt to be speculative. The price changes with 
every change in the general opinion as to the future 
course of the rent. 



CHAPTER XXIV. 

CONSEQUENCES OF DIMINISHING RETURNS. 

1. Effect of Diminishing Returns on Wages and Profits. — 

The law of diminishing returns has an obvious bearing 
on the course of wages and profits in a country as its 
population increases in numbers. When once the popu- 
lation has reached the stage at which the best sources 
of food and materials, worked at their point of maximum 
return, are no longer sufficient to supply the whole de- 
mand, individual wages or profits, or both, must tend to 
decline. Further additions to the number of producers 
are not followed by corresponding additions to the gen- 
eral product of industry, unless the natural tendency to 
diminishing returns in the extractive industries, be offset 
by increased productiveness of labor in other ways. 

Of course the falling off in proportional return does 
not begin simultaneously in all the extractive industries. 
The different kinds of natural wealth are nowhere in 
equal ratio to the human need of them. The resources 
of some kinds may be practically unlimited ; but there 
are others that are never so. Among the latter must be 
placed the most productive sources of the better varieties 
of food, fuel, and clothing, — the articles of prime neces- 
810 



Effects of Diminishing Returns. 311 

sity for everybody. In the production of these the point 
of diminishing returns is reached at a comparatively 
early stage in the growth of population. 

Now, in regions where this stage has been passed, 
the opportunities for making profit at any given rate 
of wages are governed, not by the general or average 
productiveness of labor, but by its productiveness under ' 
the conditions which have to be faced in obtaining the 
last additions to the product of industry. This is a 
point of great importance in relation to wages and profits 
in a country where increase of population is attended by 
diminishing returns. The amount a given number of 
additional laborers can add to the product of industry 
constitutes the inducement open to employers for engag- 
ins their services. No matter how much other men are 
producing, the new-comers must stand on the basis of the 
addition their own exertions can make to the general 
product. 

Compelled by the nature of the case to apply their 
labor to inferior natural agents, or under less favorable 
conditions than the previous laborers have done, they 
cannot produce as much as the same number produced 
previously. It follows that either their wages, or the 
profits of their employers, must be less than those pre- 
viously earned by equally capable producers. 

But this is only a small part of the case. Under free- 
dom of competition, there cannot be one level of wages 
and profits for the former inhabitants, and another lower 
level for the additional producers. The wages of all 



312 Political Economy. 



equally capable laborers, and the opportunities for profit 
open to all employers, must be roughly equal. Equality, 
in this case, is brought about by a decline of all wages 
and profits to the level of those obtainable by the addi- 
tional laborers and their employers. 

What is lost by the general body of producers in this 
way goes as rent, to the owners of the better natural 
agents. Competition forces the employers who have the 
use of the better opportunities for production, to pay 
over to the owners of them an amount roughly equiva- 
lent to the economic rent, or excess of product due to the 
special advantage in each case. 

For example, let us suppose a country has reached the 
stage of diminishing returns in her chief extractive in- 
dustries, with a population of twenty millions, and that 
the population goes on increasing until it reaches twenty- 
five millions. The effect on wages, profits, and rents will 
depend on the extent to which say the last million falls 
short of adding to the product of industry as much as 
each of the original twenty millions produced. Suppose 
they add only nine-tenths as much, then it is, for the 
employers of labor, precisely as if the whole twenty-five 
millions produced only twenty-five times as much as this 
last. Whatever they do in fact produce beyond this may 
be claimed by the owners of the natural agents as rent. 
While the number of laborers has increased in the ratio 
of 20 : 25, the product from which profits must be drawn 
has risen only in the ratio of 20 : 22^ {i. e. 20 : 25 x j9_). 
The balance, whatever its amount, is rent. 



Effects of Industrial Improvements. 313 

2. Diminishing Returns Counteracted by Improvements. — 

It is obvious that industrial improvements of every 
kind have an effect precisely the opposite of that just 
considered. Every invention or discovery that enables 
us to produce a greater quantity of any commodity by 
a given amount of labor, makes the industry of the com- 
munity more productive than it was before, and thus 
tends to raise the wages and profits of producers. 

The same effect is produced, in the crowded portions 
of the world, by the importation of cheap food and ma- 
terials from other countries. This lessens the pressure 
on the home sources of supply, and thus prevents the rise 
of rents and the decline of wages and profits as the 
population increases. Herein lies, for the crowded parts 
of all countries, the great importance of improvements 
that cheapen transportation. 

We see, then, that the actual course of industrial 
returns in a country, as its population grows, depends 
on the question whether the falling off in the propor- 
tional yield of labor used in its extractive industries is, 
or is not, fully counterbalanced by improvements in its 
industries as a whole. 

The rapid and wonderful improvements of the past 
hundred years have apparently more than counterbal- 
anced the diminishing returns from the chief natural 
agents, — giving us for the time an increased return for 
labor and waiting. Whether this can continue much 
longer, in the face of the enormous increase of popula- 
tion that is going on in the world, is at least open to 



314 Political Economy. 



serious doubt. Discoveries and inventions are striking 
in their effects; but they are somewhat fitful and un- 
certain in their coming, and each of them is limited in 
application. The action of diminishing returns, on the 
other hand, though silent and gradual, is certain, univer- 
sal, and always progressive. That it must in the end 
prevail over human ingenuity hardly admits of a doubt.^ 

3. Checks on Increase of Population. — Eeason tells us 
that there is a limit to the number of inhabitants the 
world, with its limited resources, can sustain. That we 
cannot now say definitely what the limit is, is no ground 
for denying its existence. It is hardly credible that a 
thousand persons can ever find sustenance in the average 
space now occupied by one. It is quite incredible that 
a million should ever do so. 

Now the limit to increase of population will be reached, 
not by a sudden shock, but by the cumulative action of 
diminishing returns. The precise mode in which the 
arrest of increase will come about, will depend, in each 
country, on the behavior of the inhabitants. There are 
two alternatives, — the number of births may diminish, 
or the number of deaths may increase. 

1 Those who argue ihe contrary forget how largely the improved 
returns of recent times are due to mere redistribution of population 
by emigration to new countries, and to cheapening of transportation. 
These are devices that must exhaust their benefits comparatively 
soon. There are no more New Worlds to be opened up. When 
America and Australia become as thickly peopled as England and 
Belgium, cheap transportation will be of comparatively little avail as 
a means of counteracting the effects of diminishing returns in the 
older countries. 



Checks on Increase of Population. 315 

The first of these is called the "prudential check on 
population." It is a check that is already operative in 
every civilized community. It is merely that feeling of 
common prudence and regard for the future, which pre- 
vents intelligent young people from assuming the care 
of families, without having the means to provide an ade- 
quate support for them. As earnings fall off through 
the action of diminishing returns, this motive may be 
counted on to restrict more and more the number of 
births in every community where the mass of the people 
are governed by prudence and forethought. 

This check evidently rests on the standard of living 
which people are accustomed to, or which prevails in the 
social group to which they belong. Few persons will 
lightly adopt a course that is sure to entail loss of accus- 
tomed comforts or of social standing. The higher the 
standard of living among the mass of a country's inhabi- 
tants, the slower will be the increase of its numbers and 
the smaller its eventual population. 

This principle has an obvious connection with the 
law of wages. It means that the general level of wages 
in each country depends, in the long run, on the degree 
of self-control practiced by the bulk of its people. Low 
wages are the inevitable result of reckless increase of 
numbers ; high wages are inseparable from restraints on 
increase. Nothing can prevent wages from eventually 
reaching that level, be it high or low, which the mass 
of the laborers themselves look upon as adequate for the 
support of a family. 



316 Political Economy. 



The second or " positive " check on increase of popula- 
tion comes into play wherever the first does not exist, or 
has proved too weak. The prudential check acts through 
fear of want ; this one acts through want itself. Where- 
ever more people are born than can find proper nourish- 
ment and shelter, the death-rate rises. A decreasing pro- 
portion of those that are born reach maturity. Diseases 
of all kinds multiply, finding ready lodgement and easy 
victims among the badly housed, ill-clad, and meanly 
nourished masses of poor. Famines occur from time to 
time, with pestilence following, to carry off the redundant 
population that other destroying agencies have spared. 

These positive checks on increase overtake men, in 
common with the lower animals, wherever they multi- 
ply with brutish disregard of consequences. It is these 
checks that, in the last resort, keep down all forms of 
animal life on the earth. Were it not for the attacks 
of enemies, and the lack of suitable nourishment, there 
is no animal that could not long since have filled with 
its increase every inch of the habitable globe. Men 
have two points of great superiority over the lower 
animals : they have no living enemies to fear except 
one another, and they can do much to improve their 
surroundings. But without due restraint on increase, 
they eventually expose themselves to limiting forces no 
less terrible and effective than those that restrict lower 
forms of life. 

These doctrines, as to the ultimate limits of popula- 
tion, are known as Malthusianism, from the name of 



Wages under Diminishing Returns. 317 

Mr. Malthus, the economist who first expounded them. 
They have been frequently controverted, especially by 
persons who did not clearly understand them; but they 
seem to rest on very solid foundations.^ 

4. Sharing of the Loss from Diminishing Returns. — The 
division, between laborers and employers, of the loss 
from diminishing returns, follows the principles stated in 
Chapter XVIII. The question is how the increase of 
savings, in the sense of real savings, compares with the 
increase of laborers seeking employment. If savings, 
measured in the things that laborers need, increase as 
fast as the number of laborers, the whole loss falls on 
profits. So far, however, as savings fall short of keeping 

1 It is important to remember that, at any given rate of increase, 
the absolute growth of numbers in a country becomes more and more 
rapid as time goes on. If, for example, the United States, starting 
with a population of sixty millions, were to go on doubling its num- 
bers every thirty-three years, the absolute increase in each successive 
period would be as follows : — 

Increase. Population at end of period. 

First period 60,000,000 120,000,000 

Second period .... 120,000,000 240,000,000 

Third period 240,000,000 480,000,000 

Fourth period .... 480,000,000 960,000,000 

In the ninth period (end of three hundred years), the increase 
would be 15,360,000,000, bringing the total population up to 30,720,- 
000,000. In the thirtieth period (end of one thousand years), the in- 
crease would be 32,212,254,720,000,000, bringing the total population 
up to 64,424,509,440,000,000. It is easy to see that a uniform rate of 
increase must in the end make the mere question of standing-room 
a matter of difficulty, — to say nothing as to the means of supporting 
life. Checks on the rate of increase, and eventual arrest of all 
increase, would thus seem to be a physical necessity. 



318 Political Economy. 

pace with the increase of laborers, the loss is thrown on 
wages. 

In order that savings shall increase as fast as laborers, 
it is obviously necessary that, as time goes on, an increas- 
ing proportion of all that is produced shall be saved for 
investment, • — and this in spite of the declining returns. 
This would imply that profits were high at the outset, 
and that the spirit of saving is steadily growing. Where 
these conditions are fulfilled, the loss from diminishing 
returns may fall for generations mainly, or even wholly, 
on the employing class. But of course there is a limit, 
beyond which the decline of profits could not go without 
arresting increase of savings. There is a necessary rate 
below which even the previous volume of savings would 
not be maintained. As this point is approached, the loss 
from increased pressure on natural agents must fall more 
and more on the laborers. 

It is well to note the precise mode in which dimin- 
ishing returns take effect on wages. The two principal 
items in the expenses of a laborer's family namely, tene- 
ment and table, are precisely the things that are most 
affected by increase of population. At any given scale 
of money-wages, a n'se in house-rents and in the price of 
food leaves a smaller amount for spending in other ways. 
Unless, therefore, other things are greatly cheapened, or 
money-wages rise, it becomes impossible for a laborer 
to maintain a family in the former degree of comfort. 
Where this occurs, tlie decline of real wages may call 
into greater activity the prudential checlv on increase of 



Rents not Necessarily Lost to Wages. 319 

numbers. If it does, the ratio of money-savings to the 
number of laborers will gradually change in favor of 
the laborers, and real wages will rise again. If it does 
not, the result will be a permanent and progressive low- 
ering of the condition of laborers and their families.^ 

The whole matter depends, then, on the working of 
the principles that govern savings on the one hand, and 
growth of population on the other. Every circumstance 
that favors increase of savings, or repression of the num- 
bers seeking employment, tends to preserve the mass of 
mankind from loss of earnings by reason of diminishing 
returns from natural agents. 

5. Results Modified by use of Rents in Paying Wages. — 
On the side of savings there is one further circum- 
stance to be considered. There is one kind of income 
that increases as the proportional return for labor dimin- 
ishes. The rise of economic rent makes the behavior of 
the rent-receiving class an element of considerable and 
ever-growing importance, in determining the course of 
wages. Though rent must be deducted from the product 
of industry when the question is to find the profits on 
past outlay, it remains a part of the product of industry 
when the question is of present resources for paying 
wages. Income from rent may be saved and used in 

1 Possible rise in the cost of gold is intentionally omitted. It 
would doubtless be more accurate, though less clear, to state the prin- 
ciple thus: When, taken as a whole, the things constituting real 
wages become more costly, real wages must decline, unless an in- 
creased proportion of the currency, in its circuit, be turned into 
money-wages. See p. 200, top. 



320 Political Economy. 



hiring laborers as readily as income of any other kind. 
Just as in the case of profits, what is lost to the laborers 
through rent, is not the amount the landlords receive, 
but the amount they consume. 

Here, then, is a source from which increase of savings 
may be looked for as population increases. It is prob- 
able that rent-receivers spend more freely on themselves 
than other classes ; but they are not exempt from the 
common eagerness for increase of wealth. Even in coun- 
tries where they form a separate class, mostly abstaining 
from active business, their savings have a great influence 
in sustaining the rate of wages in the face of diminished 
returns. Further, as a class, landlords usually employ 
many servants and personal attendants, — so that a part 
even of their spendings are in aid of wages. It would 
therefore be a great mistake to suppose that whatever 
accrues as rent, out of the current product of industry, 
is thereby withdrawn from the support of laborers. It 
may be paid to them for their help in the production 
of commodities that are still in the future, or for any of 
those non-productive services that rent-receivers so com- 
monly demand. 

This, however, does not invalidate the principle stated 
in § 1. It does not alter the law of diminishing returns. 
It merely tempers, at any given time, the action of the 
law in the case of wages. It means simply that, as 
population increases, the source of wages does not con- 
tract, relatively to the number of laborers, as rapidly as 
the returns for additional labor fall off. Where economig 



Bents may become Wages. 321 

rent exists, the industrial product from which wages may 
be drawn, exceeds, by the amount of the rent, the product 
on which employers must rely for their profits. 

The situation is, therefore, more favorable for the 
laborers than it would be if all the natural agents were 
as poor as the poorest in use. But it is correspondingly 
less favorable for the employers. So far as rents are 
turned into wages, thus keeping wages up in spite of 
diminishing returns, the result is to throw the brunt 
of the loss on profits. The consequent decline of profits 
must eventually check the aggregate flow of savings 
from all sources. The conversion of rent into wages 
cannot, therefore, in the long run, protect the laborers 
from the consequences of undue increase. It may post- 
pone, but it cannot prevent, the ultimate fall of wages. 
Its eventual effect may only be to afford the reduced 
scale of wages to a larger population than could find 
employment, even at that rate, if the owners of the 
better natural agents consumed the whole rent them- 
selves in the form of luxurious commodities. 

QUESTIONS AND EXERCISES. 

1. What cu'cumstances determine the normal level of wages in 
a community ? 

2. Why are wages higher in some countries than in others ? 

3. Show that real wages depend on the relative height of money- 
wages and prices (including house-rents). 

4. If, for the coming year, all persons who have money to spare 
should spend it in buying goods for their own use, what would 
the effect be on wages ? 



322 Political Economy. 



5. What are the grounds foi- holding that tlie general level of 
wages cannot be raised by strikes ? 

6. Mention circumstances that would be likely to depress mar- 
ket wages below the normal level, and describe the process of 
recovery in such a case. 

7. In what sense do the wages of the present time depend on 
past savings? 

8. How do labor-saving inventions affect wages ? 

9. Why is it difficult to ascertain the precise rate of profits at 
any time? 

10. What do the aggregate profits of the whole body of em- 
ployers depend on ? 

11. Show that aggregate profit;; may rise without a fall of real 
wages, and that real wages may rise without a fall of profits. 

12. Name the three principal factors on which the profits of 
the individual employer depend. Show how a change in any one 
of these affects his profits. 

13. How do you account for the notable diffei-ences in the 
profits of individual employers? 

14. Distinguish between economic rent and rent in the popular 
sense. Is the rent of a city house economic ? 

15. How do railroads affect rents? 

16. Explain carefully the connection between rent of land and 
the price of food? 

17. What is meant by the law of diminishing I'eturns? 

18. What is the error in assuming that wages may be discov- 
ered at any time by deducting profits and rent from the product 
of industry ? What would the remainder be ? 

19. On what does the normal rate of interest depend? Is it 
affected by changes in the supply of money? Mention circum- 
stances that cause the market rate of interest to be high. 

20. What does the price of land depend on ? Why is it more 
variable than other prices? 



CHAPTEE XXV. 

EXCHANGE OF PRODUCTS BETWEEN SEPARATE COM- 
MUNITIES, OR INTERNATIONAL TRADE. 

We must now enter upon a subject involving very 
considerable difficulties in itself, and made doubly diffi- 
cult by the apparently endless controversies that are 
connected with it. It is needless to associate this little 
book with one side or the other in the issue between 
Free Trade and Protection. But the exchange of prod- 
ucts between whole communities of men is too interest- 
ing and important to be passed over without discussion 
in any general study of economics. I propose, therefore, 
to set down in this chapter certain general truths and 
elementary facts in connection with foreign trade, as to 
which I suppose all intelligent men would agree in sub- 
stance, however much they might differ in their ways 
of interpreting them. In the next chapter I shall try to 
state, as briefly and impartially as I can, the two oppos- 
ing views as to the benefits, or the injurious effects, of 
unrestricted foreign trade. 

1. International Trade an Exchanging of Products. — 
The first thing to note is, that trade between communi-. 
ties, like all other trade, is always at bottom an exchang- 
ing of products. The exchange is disguised, but less so 

323 



324 Political Economy. 

than in the case of exchanges withm each community. 
It is not involved with the payment of wages. But 
money is employed with the same complicating effect. 
The importation of goods is carried on by a different 
set of men from those who carry on the exportation of 
goods. Again, the goods exported are not always sent 
to the place from which the imports come. Yet it is 
easy to demonstrate that every country pays for its im- 
ports by means of exports ; and this not in any loose 
or half figurative sense, but in strict and literal fact. 

In the trade between communities a special form of 
paper currency is used, which has not yet been spoken 
of, — namely, Bills of Exchange or Drafts. The nature 
and use of bills of exchange may best be seen from an 
example. Suppose A. B. of New York sends a cargo 
of wheat to CD. in Liverpool, he does not ordinarily 
wait for C. D. to send him money in return. Instead of 
this he draws a bill on C. D. for the amount, and sells 
it to an exchange broker,^ getting in this way the means 

1 Exchange brokers are a class of bankers who buy and sell bills of 
exchange. In this country the ordinary banks act as exchange brok- 
ers. Bills of exchange vary in form. They differ from checks in two 
important particulars : they may be drawn on any person who owes 
money to another ; and the time for making the payment (that is to 
say, whether " at sight " or in a certain number of days " after sight ")' 
is always mentioned in the bill. The following specimen will serve to 
show how A. B. draws on C. D. in favor of Smith, Jones & Co., the 
purchasing brokers: 
Exchange for £1000. New York, January 2, 1889. 

Sixty days after sight pay to the order of Smith, Jones & Co. one thousand 
pounds sterling, for vahie received, and charge the same to account of 
To C. D., Liverpool, England. A. B. 



Exports Pay for Imports. 325 

to buy a fresh cargo. The broker forwards the bill to 
his London " correspondent," who attends to the collec- 
tion and places the amount to the broker's credit. 

Similarly, when E. F. of New York imports a cargo of 
steel rails from G. H. in Birmingham, he does not for- 
ward cash in return, but goes to the broker for a bill. 
The broker sells him a bill on his London " correspond- 
ent." This is sent to G. H., who readily obtains the 
money for his steel rails by means of it. 

Thus the bill-brokers manage the collections for goods 
exported and make the payments for goods imported. 
They are able to do this very cheaply, because they can 
ordinarily use the proceeds of the bills they buy from 
exporters, to meet the bills they sell to importers. For 
example, in the case given above, the money collected 
from C. D. is simply turned over to G. H. In this way 
the wheat sent out by A. B. is made to pay for the steel 
rails imported by E. F. The bill-brokers contrive very 
easily to balance off all our obligations to the various 
countries of Europe against their indebtedness to us. 
In this way hundreds of millions' worth of goods may be 
paid for without the actual sending of a single dollar. 
There could be no clearer proof needed to show that 
international trade is strictly an exchange of products. 

2. The Rate of Exchange. — The exchange-brokers 
make their profit by charging a little more for the bills 
they sell than they pay for the bills they buy. Both 
their buying price and their selling price may rise or 
fall together. Exchange on foreign countries may be at 



326 Political Economy. 

a premium or at a discount, depending on the relative 
demand and supply of bills. • 

When exports of merchandise exceed imports, the 
bills brought to the l)rokers by the exporters exceed in 
amount those called for by the importers, — the supply 
exceeds the demand. In this situation the price falls. 
In the reverse case, — that is, when imports exceed ex- 
ports, — importers demand more bills of the brokers than 
exporters are bringing to them for sale, and the price 
of. bills rises. 

Whatever the relative demand and supply of commer- 
cial bills, the brokers stand ready to buy all that are 
offered to them, and to sell as many as are called for. 
But when they sell faster than they buy, they do so at 
the risk of having to bear the expense of sending over 
gold to cover the balance; for, just as in the case of a 
private person drawing on a bank, they must not over- 
draw their account with the foreign banker on whom 
they sell bills. In the reverse case, they Ijuy bills with 
the certain prospect of liaving to l)ring the proceeds 
home. Tliey cannot go on indefinitely paying out money 
at home for the right to collect money abroad, without 
some way of replenishing their home supply. But if 
customers are lacking for the money they have to their 
credit abroad, they can at least bring it home for use 
in buying more bills. The cost of thus sending money in 
the one case, and of bringing it in the other, gives the 
limit of the rise and fall of the j^rice of exchange. 

In the case of bills on England, par of exchange is 



Movements of Money between Countries. 327 

$4,861 = £1. Now brokers can profitably send gold to 
England and sell bills against it at the rate of about 
$4.89i for the pound. This is therefore the upper limit 
of the premium they can charge for " sight " bills. Ex- 
change is then said to be at the "shipping point." In 
this situation, the exporter is able to get a premium 
(about $4.88 for £1) when he sells his bill to the brokers. 
(Of course bills that are not payable at sight are always 
lower than "sight" bills.) 

There is a corresponding lower limit of the rate for 
" sight " bills, which depends on the cost of bringing over 
actual money. Brokers can make a fair profit by buying 
bills at $4.83 for £1, even if the only use they can find 
for the proceeds is to have the money brought to Amer- 
ica. This, therefore, is the gold-importing point, or lower 
limit of the rate of exchange on England. 

It is to be remembered that gold passes from country 
to country simply by weight, even although it be in 
the form of coins. When we say that $4.86 f equals the 
English pound, the meaning is that this is the relative 
weight of pure gold in the dollar and the sovereign. In- 
cidentally, it is worth noting that bankers do not always 
send to the mint the foreign coins they import. It may 
be an advantage presently to have gold in the form 
of foreign coin for sending back, when the balance of 
exchange turns the other way. 

To be accurate, the balance of imports and exports is 
only the chief and usual occasion for the movement of 
money between countries. Every other business relation 



328 Political Econoimj, 

of each country to other countries must come into the 
account and help to determine the rate of exchange, 
i'or example, if foreign capitalists invest in our railroads 
or buy our government bonds, we may have a balance of 
imports over exports equal to the sum they invest, with- 
out causing gold to be sent abroad. On the other hand, 
if we have to pay ten millions annually as interest 
to foreign holders of our bonds, and ten millions more 
for the expenses of Americans travelling in Europe, our 
exports may exceed our imports by twenty millions 
without causing gold to come to us. 

3. How Exports and Imports are kept roughly equal. — 
A country cannot go on permanently getting from other 
countries more than she gives them in return. When 
her debts to foreign nations exceed her claims against 
them, gold has to be sent to settle the balance. The 
effect of a continued export of gold is to lessen gradually 
her home-supply of money, and thus cause a decline in 
the prices of her products. Not only so, but the increased 
supply of money in the countries to which the gold is 
sent causes a rise in the prices of the things she buys 
of those countries. This double change of prices tends in 
two ways to bring about an equality of exports and im- 
ports, and thus put an end to the outflow of gold. First, 
it becomes easier than it was before to make a profit by 
sending things abroad to be sold. Secondly, it becomes 
harder than it was before to find a profitable sale for im- 
ports. In this way exports are stimulated and imports 
are checked, until equilibrium is reached. 



Exports and Imports tend to Equality. 329 

It is thus, made certain that a drain of money from 
one country to another cannot go on permanently ; that 
a country must in the long run give commodities for 
commodities. A case may easily be imagined in which 
one country should have all her prices above those of 
another, to such an extent that a one-sided trade should 
set in between them, — - the country of high prices send- 
ing the other nothing but money in return for imports. 
But such a trade could not last. The transfer of money 
would soon cause a fall of prices in the one, and a rise of 
prices in the other, until the difference became too slight 
to afford a profit, for the movement of goods; Then the 
trade would cease, — that is, if the change of prices failed 
to open a chance for sending goods, with a profit, where 
cash was sent previously. The thing certain to happen 
is the cessation of the outflow of money. 

A country cannot long have imports without export- 
ing an equivalent. So neither can it have exports with- 
out importing an equivalent. The money of the world 
could not always move towards one country without in 
the end stripping other countries of their necessary 
share. 

The principles here stated must be slightly modified 
for the case of the gold-producing countries. Most of 
the world's supply of gold is produced in two or three 
countries. The new gold must find its way out of these 
and distribute itself over the commercial world. It can 
do so only through the ordinary process, by going out in 
payment of balances accruing against these countries on 



330 Political Economy. 

their general trade with the rest of the world. Though 
gold is, for the gold-producing countries, a commodity 
and a part of its product of industry, yet it is an article 
which cannot have a lower price in one country than in 
another, for gold has no price. The excess of gold in the 
countries producing it keeps their general level of prices 
above the level prevailing in other countries : with the 
result that their importation of ordinary commodities is 
steadily greater than their exportation. This causes the 
demand for bills on other countries to be greater than 
the supply ; exchange is ordinarily at or near the ship- 
ping point. The brokers have to send gold, from time 
to time, to cover the bills they sell in excess of those 
they buy. In this way the gold makes its way to other 
countries. 

4. Prices of the Goods Exchanged must Differ in the 
Trading Countries. — It may be taken for granted that 
no man would ordinarily send an article to another coun- 
try to be sold, unless he expected to get a higher price 
for it than he could get at home : enough higher to pay 
the freight, insurance, and other costs, tocjether with some 
balance over by way of profit on the transaction. Cer- 
tainly no man would make a business of buying products 
in one country and selling them in another, unless the 
difference of price in the two countries was sufficient to 
give him ordinary profits on the business. 

Also, we may assume that the difference in price in 
the two countries cannot ordinarily be more than enough 
to cover all costs and charges, and leave ordinary profits 



Basis of Tixide between Countries. 331 



for those who carry on the business. The competition 
of other capitalists may be relied on to keep the profits of 
this class of traders on a level with those made in other 
business. 

The smaller the value of an article, in proportion to ite 
weight and bulk, the greater must be the difference in 
its price in the two countries in order to make a trade 
in it profitable : for the cost of transporting such articles 
is great in proportion to their value. Thus, the price of 
coal in Massachusetts must differ more from the price 
of coal in Pennsylvania than the price of shoes differs 
in the two States. The price of lumber in the United 
States and in France must differ more widely than (apart 
from Customs' duties) the price of silk differs in the two 
countries. 

5. Trade between Communities Due to Difference in 
Relative Cost — From the fact that the prices of the 
articles exchanged differ in this way in the trading coun- 
tries, we can infer a principle of fundamental importance 
in relation to trade between separate communities. This 
principle is, that no exchange of commodities can exist 
between two countries except there be a difference in 
the comparative cost to employers of producing the com- 
modities in the two countries. If we construct a scale 
of prices for each country, and compare the one scale 
with the other, the point will at once stand forth clearly. 
Suppose wheat to be ordinarily exported from this coun- 
try to Sweden, and iron to be regularly imported from 
Sweden. Suppose farther, that the American price of 



332 Political Economy. 



wheat is ninety cents a bushel, and that fifteen cents 
additional must be obtained in Sweden in order to give 
the exporter a profit over expenses. Also, that the price 
of a hundred-weight of iron in Sweden is $1.00, and that 
the importer must have twenty cents additional for 
bringing it to the United States. Putting these facts 
in the form of a diagram, we readily see that the ratio 



United States. 




Sweden. 


fl.20 




11.20 


1.15~ ~'--.,^ 
1.10 


-^??o. 


1.15 
1.10 


1.05 


~~~~,^ 


,,,-1.05 


1.00 


,,-'''' 


"'---. 1.00 


.95 ...- 


.—'VJUea^- 


.95 


.90'"" 




.90 



of the price of wheat to the price of iron is different in 
the two countries. In the United States it is 90:120; 
in Sweden it is 105 : 100, (or 90 : 86). This tells us 
unmistakably that the comparative cost to employers 
of producing wheat and iron in the United States is 
different from the comparative cost of producing them 
in Sweden. For if it were not, this difference in the 
ratios of the prices could not last; American employers 
would produce iron in preference to wheat; Swedish 
employers would find wheat-raising more profitable than 
the production of iron So the ratio of prices would be 
changed and the trade would cease. 

It is thus easily demonstrable that where a regular 
trade exists between two countries there must be, for 



A Measuj^e of Comparative Cost. 333 

the time being, a difference in comparative cost at least 
equal to the cost of transporting the goods exchanged. 
How the difference arises, whether or not it is necessa- 
rily permanent, and whether it is expedient in any case 
to impose countervailing duties to check the trade, are 
questions not now under consideration. We are here 
concerned only with discovering the present facts which 
an existing trade implies. Whatever views we may hold 
as to the expediency of protective duties, we are in duty 
bound, as students, to search out the facts which give 
rise to the tendency to trade between countries. 

6. How the Difference in Comparative Cost might be 
Ascertained. — How great the whole difference in com- 
parative cost may be, in any case, cannot be inferred 
from the prices at which the trade goes on. We can 
only be sure that it is at least somewhat greater than 
the difference between the ratios of the prices. In 
order to discover how much greater it is than this, the 
trade would have to be stopped. For the price of wheat 
in Sweden is kept down by the cheap supplies from 
the United States ; and the price of iron in the United 
States is kept down by the cheap importation from 
Sweden. 

If two countries wished to discover the extent of the 
difference between their ratios of cost to cost in the case 
of the articles exchanged, they might obviously do so 
by means of import duties. By imposing duties, and 
raising them year by year until they reached a height 
just sufficient to prevent the trade, they could find in the 



334 Political Economy. 



new ratio of prices, in each country, a pretty accurate 
measure of the difference in comparative cost.^ 

Let us suppose that, in our example, it were found that 
with a duty of thirty cents a hundred-weight on iron, 
and fifteen cents a bushel on wheat, some trade would go 
on permanently, but that at any higher rates the trade 
must cease. Wheat must then stand at $1.20 a bushel 
in Sweden, and iron at $1.50 a hundred-weight in the 
United States ; these being the prices necessary to give 
the traders a profit on the business, after paying the 
additional charges. The ratio of the price of wheat to 
that of iron in the United States would then be 90 : 150, 
and in Sweden it would be 120 : 100 (or 90 : 75). 

On the supposition that these prices continued, they 
might safely be taken to show the comparative cost of 
production of wheat and iron in each country. For, 
if American employers found the production of iron at 
$1.50 a hundred-weight more profitable than the produc- 
tion of wheat at ninety cents a bushel, they would grad- 
ually desert the production of wheat altogether. And 
so of the production of wheat in Sweden ; if Swedish 
employers found it more profitable to raise wheat at 
$1.20 a bushel, than to produce iron at $1.00 a hundred- 
weight, they would gradually desert the production of 

1 Strictly, it would not matter whether the barrier to tlie exchange 
were duties imposed by both countries or a sufBciently high duty im 
posed by one of the two. The former alternative is suggested because 
it works out more simply, — the trade being checked equally on each 
side. If the check came from one side only, there would be a transfer 
of money and a re-adjustment of prices in each country. 



Differences in CoTYi'parative Cost. 335 

iron. If the production of wheat goes on in the United 
States, and of iron in Sweden, on these terms, it must be 
because the ratio of cost to cost in Sweden differs from 
that in the United States to the same extent as the ratios 
of the prices differ. That is to say, in Sweden seventy- 
five bushels of wheat cost employers as much as ninety 
hundred- weight of iron (75 x $1.20 = 90 x $1.00); whereas, 
in the United States, one hundred and fifty bushels of 
wheat are produced at the same cost as ninety hundred- 
weight of iron (150 x $0.90 = 90 x $1.50). Or, changing 
the form of statement, Sweden's ratio is 1 bu. = 1\ cwt., 
whereas ours is 1 bu. = | cwt. 

7. Difference in Comparative Cost a Basis for Trade in 
all Cases. — These figures tell us nothing as to the source 
of the difference in comparative cost ; nor does it matter 
in the least, as regards the course of the trade, how the 
difference arises. It may be wholly due to inferiority on 
Sweden's part as a producer of wheat, or wholly to supe- 
riority on her part as a producer of iron, or partly due to 
each of these causes. Or it may be that both wheat and 
iron can be produced with less labor in the United States 
than in Sweden, our advantage being greater in the pro- 
duction of wheat than in the production of iron. As to 
these points our figures give no information ; they merely 
make it clear .that where trade exists, a difference in 
comparative costs must exist as the basis of it. 

It may .seem strange, at first blush, that a commodity 
could ever be regularly exported with a profit to a coun- 
try in which it can be produced with less labor than in 



336 Polihcal Economy. 



the exporting country. But all that is necessary to bring 
this about is a difference in the comparative cost to 
employers of producing any two commodities in the two 
countries. The explanation of the seeming puzzle is, that 
the money cost of a commodity may be less in one coun- 
try than in another, while the true or economic cost is 
greater. Though it costs employers less money to get a 
hundred-weight of iron produced in Sweden than it does 
in the United States, the quantity of labor required may 
be indefinitely greater in Sweden than here. Money- 
wages and the prices of materials may be lower there 
than here, because the value of money may be higher 
there than here. This result would obviously come 
about, if Sweden should buy freely of our wheat, with- 
out having any product of her own cheap enough in 
j^rice to be profitably exported to us. Her money sup- 
ply would be gradually drawn away ; her general scale 
of prices and her money-wages would decline. If her 
inferiority to the United States be less in iron than in 
other things, it is clear that iron would be the first 
thing to be made low enough in price to be sent to us 
with a profit for the sender. 

If any person be disposed to doubt whether trade be- 
tween countries rests on, and implies, a difference in the 
ratios of costs, he will find it instructive to consider the 
case of two countries differing strongly in advantages 
for production, but differing equally in all commodities. 
In such a case, the ratio of cost to cost would be the 
same in both countries, and there would be no basis for 



Disparity of Resources no Basis for Trade. 337 

a permanent trade. It might happen that, for some 
cause, prices in one should be enough higher than prices 
in the other to cause a movement of goods for a time. 
But gradually the return movement of money would 
bring prices towards a common level ; one after another, 
according to costliness of transportation, commodities 
would cease to be exportable, until finally, even those 
having greatest value in the least bulk, would come to 
be so nearly equal in price in both countries that no 
profit could be made by sending them. Then all trade 
would cease. This would come to pass, even if the one 
could produce every commodity with half of the labor 
required to produce it in the other. An equal advantage 
in all things has no tendency to cause an exchange of 
products. Its only tendency is to cause men to emigrate 
from the country of poor resources to the country of rich 
resources. This is the only way by which people living 
in a country of poor resources can get any permanent 
benefit from a country superior to their own in all points, 
and equally superior in all. 

8. International Values. — When a trade exists between 
two separate communities, what determines how much 
the product of the one shall be worth as compared with 
that of the other ? What determines the amount of iron 
we shall get from Sweden in exchange for each bushel 
of wheat ? Of course this depends, at any given time, on 
the price of each. But prices, as we know, may change. 
If wheat rises in price, or iron falls, we get more iron 
than before for every bushel of wheat. What deter- 



338 Political Economy'. 



mines the relative prices of the two articles, as a perma- 
nent rule ? 

In the first place, we easily see that there is nothing 
in this sort of exchanging to make the value of each 
product correspond to the quantity of labor and waiting 
required to produce it. Value tends to conform to cost 
of production only where there is freedom of competition 
between the producers. It is not open to the young 
laborers to choose freely between the exchanging indus- 
tries : to choose, for example, between raising wheat in 
the United States and producing iron in Sweden. We 
have nothing, therefore, in this kind of exchanging, to 
keep the values under the control of cost of production. 

The comparative costs of production do, however, set 
limits within which the values must ordinarily stand. 
If, in our supposed trade with Sweden, the ratio of cost 
to cost in each country be as given in § 6, it is obvious 
that the price of our wheat to Sweden cannot exceed the 
price she gets for one and one-fifth hundred-weight of 
iron ; nor can we take less than the price to us of three- 
fifths of a hundred-weight of her iron. At a price out- 
side of these limits either way, one country or the other 
would give up the trade ; for her employers could more 
profitably produce the desired article at home, than the 
export to be sold in exchange for it. 

Within the limits thus set by the comparative costs, 
the terms of the exchange are fixed by the relative 
demand of each country for the other's product. If 
Sweden has a strong demand for our wheat as compared 



Law of International Values. 339 

with our demand for her iron, this will cause the prices 
to approach her own home ratio of costs ; our prices will 
rise and hers will fall until the price of a bushel of 
wheat is near to the price of one and one-fifth hundred- 
weight of iron. If, on the other hand, our demand for 
her iron be relatively greater than her demand for our 
wheat, the prices will approach our home ratio of costs ; 
the price of a bushel of our wheat will be near to the 
price of three-fifths of a hundred-weight of her iron. 

9. Values Changed by Movement of Money. — This prin- 
ciple works itself out in practice through the movements 
of money in payment of international balances. It may 
therefore take many years to accomplish its result ; but 
the result is, in the end, inevitable. It works slowly 
because it has to change not merely the prices of the 
articles traded in, but the whole scale of prices and of 
money-wages in the trading countries. 

By way of illustration, let us suppose the trade with 
Sweden to open with the prices assumed in § 5 ; namely, 
wheat ninety cents, and iron $1.00. If, at these prices, 
Sweden buys one hundred bushels of our wheat for every 
ninety hundred-weight of iron we import from her, then 
the trade may go on indefinitely on this basis. If, how- 
ever, her demand for wheat be greater than our demand 
for iron ; if, for example, she buys a million bushels a 
year in excess of the quantity our import of her iron 
pays for, then for this excess she must send us money 
year by year. The effect will be a gradual decline in the 
prices of her products, — the price of iron with the rest ; 



340 Political Economy. 



and a gradual rise in our prices, — the price of wheat 
with the rest. 

This double movement will go on until the high price 
of our wheat cuts off a part of her demand for it, and 
the low price of her iron causes us to buy greater quanti- 
ties of it. In this way the trade will reach an equilib- 
rium and the movement of money will cease. Suppose 
that when this point is reached, her iron has fallen to 
ninety-five cents a hundred-weight, and our wheat has 
risen to ninety-five cents a bushel. It is very obvious 
that, in the new situation, Sweden gets less wheat for 
a hundred-weight of her iron than she did at the start. 
Her strong demand for our product has altered the terms 
of the exchange to her disadvantage, bringing the values 
nearer to her own ratio of costs, namely, 1 bu. = 1| cwt. 

If, at the original prices, our demand had been the 
stronger, the whole movement would have been reversed ; 
our prices would have fallen and Sweden's prices would 
have risen until the trade reached equilibrium. In the 
outcome, a bushel of our wheat would pay for less of 
Sweden's iron than it did at the outset. The values 
are brought nearer to our own ratio of costs, namely, 
1 bu. = \ cwt. 

10. How these Principles Apply in Actual Trade. ^ We 
have thus far, for the sake of clearness, confined our 
view to the simplest possible case of exchange between 
separate countries. Of course, in practice, the trade 
between different parts of the world is infinitely com- 
plex. Each country trades with many others, exporting 



How Principles Apply in Actual Trade. 341 

and importing a great variety of commodities. But the 
principle governing all exchanges must be the same. 
Every country exports those things, and those only, that 
have in some other country a price enough higher than 
her own to make the exportation a source of gain to 
those who carry it on. Each country imports only those 
things that have in some other country a price so much 
below her own that the importer can make a profit. And 
these differences of price can exist permanently only 
as a result of differences in the comparative cost to 
employers of producing things in different countries. 

To the trade of each country it is as if all other coun- 
tries were one. Her exports go wherever the price is 
highest, and her imports in return come from wherever 
their price is lowest. Our wheat may go to England 
and we may get the iron in return from Sweden, — 
simply turning over to the latter country our claim on 
England. That would of course leave England indebted 
to Sweden; but with that we should have no concern. 
Our necessity is confined to giving other countries as 
a whole as much as we get of them. 

Trade goes on, at any given time, on the basis of the 
existing prices. If these prices cause any country to 
import more than her exports pay for, her prices will 
be lowered gradually by an outflow of her money. Con- 
versely, if any country's exports are more than sufficient 
to discharge her liabilities to all other countries, her 
general scale of prices will be raised by an inflow of 
money from other countries. In this way, the foreign 



342 Political Economy. 



trade of each country is brought to an equilibrium after 
every disturbance of the balance. 

A general fall in the prices of things produced in any 
country may increase its exports in two distinct ways. 
It may cause other countries to buy more of the articles 
they bought previously. Secondly, it may make it pos- 
sible to export, with a profit, articles that were not 
previously exportable, because there was not difference 
enough between the home price and the foreign price. 
There are usually some articles that are on the verge 
of exportability, and a small decline of prices may thus 
be sufficient to increase considerably the volume of a 
country's exports. In the same way a small rise of the 
general scale of prices in a country may cause increase 
of imports, by introducing new articles as well as by 
swelling the importation of old ones. The importance 
of this principle lies in the fact that it makes the estab- 
lishment of equilibrium more prompt than it would be 
if the whole burden came on a single commodity. For 
example, in the case supposed on page 340, the decline of 
Sweden's prices may not have to proceed far enough to 
bring iron down to ninety-five cents a hundred-weight. 
A less decline may open a way for the exportation of 
some other commodity not previously exported, and this 
may arrest the further outflow of money. 

The higher a country's general scale of prices and 
money-wages (that is to say, the lower the value of 
money in a country), tlie more favorably does she trade 
with other countries. Everything she exports goes far- 



Sources of Difference in Comparative Cost. 343 

tlier towards paying for imports than it would do if the 
level of prices were lower. For this reason a country 
that produces gold for other countries has a standing 
advantage in foreign trade. It gets all its imports more 
cheaply because of the steadily high level of its prices. 

11. Sources of Difference in Comparative Cost. — The chief 
sources of difference in the ratio of cost to cost, in differ- 
. ent countries, may be grouped under three general heads : 

(1) Differences in climate, soil, mineral wealth, and 
other natural resources. Each of the exchanging coun- 
tries may have great natural facilities for the production 
of some commodities which the other could produce only 
with difficulty, or not at all. The trade between tropical 
countries and countries of cooler climate is largely due 
to this class of causes. 

(2) Differences in the industrial character of the in- 
habitants of different countries, in their degree of civil- 
ization, etc. The trade between a highly civilized and a 
semi-barbarous country may be due to this cause. The 
natural resources of the two countries may be similar; 
but the possession of machinery, and of skill in using it, 
gives the civilized country great comparative advantages 
in the production of things that are made by the use of 
machinery. This makes a basis for trade, — the civilized 
country giving machine-made goods in exchange for such 
things that have to be produced mainly by hand. In the 
same way, any special aptitude possessed by the people 
of a country may create an occasion for trade with other 
countries. 



344 Political Economy. 

(3) Differences in density of population. This is a 
common source of trade between new and old countries. 
Two countries may be quite alike in natural resources, 
and in the industrial quality of their people ; but one 
may be an older country, with denser population, than 
the other. Of course the one with the denser population 
is. the first to feel the effects of diminishing returns. 
When its own home resources of any kind, worked at 
their point of maximum return, become insufficient for 
the needs of its people, the products affected rise in 
price. When the rise becomes sufficient to cover cost 
of transportation, these products begin to be imported 
from the other country, where increase of the production 
is still possible without increase of cost. 

At first, there may be no commodity low enough in 
price in the older country to make a return trade pos- 
sible. If not, an outward flow of money ensues, and 
prices fall until a return trade is developed, in commod- 
ities not affected by diminishing returns. Since manu- 
facturing is practically free from the law of diminishing 
returns, it is inevitable that the exports of the older 
country should consist of manufactured articles. 

So long as the increasing demand of the older country 
can be supplied by the new country, without increase 
of cost, the trade will proceed on this basis, growing in 
volume as years go by. When, at length, the effects of 
diminishing returns begin to be felt in the new country 
also, in the production of the commodity it supplies to 
the other, the price will begin to rise in both countries. 



Differences in Wages not a Cause of Trade. 345 

The more populous country will continue to import the 
article from the other, but the increase of supply needed 
by her from year to year, will now be partly or wholly 
produced at home. 

This principle explains why it is that countries so 
commonly produce a part of the necessary supply of an 
article at home, and procure the balance by foreign trade. 
It also indicates the natural limits of trade between new 
and old countries. 

12. Differences in Wages not a Cause of Trade. — 
It evidently follows, from the nature of the case, that 
differences in the general level of wages, comparing 
country with country, make no basis for exchange of 
products. A high or a low level of wages in a country 
affects all products alike. For example, the high level 
of wages in this country extends to the production of 
wheat and beef, as well as to the production of cloth 
and steel rails. If that were the only difference between 
this country and, say England, it could not make cloth 
and steel rails dearer here than in England, and at the 
same time make wheat and beef cheaper here than there. 
Nor can the lower level of wages prevailing in England 
be the fundamental cause of the lower price of her cloth 
and steel rails ; because it does not make her wheat and 
beef low in price also. A circumstance that is common 
to all the industries of each country, could not bring 
about that difference in the ratio of price to price in the 
two countries, which alone, as we have seen, makes ex- 
change of products possible. 



346 Political Economy. 



Remembering, however, that English cloth is brought 
over here to be sold only when the price is lower there 
than here, it may seem that a rise of money-wages in 
England, might so raise the money cost of her cloth 
as to stop the exportation of it to us. This may be 
granted, if the meaning be that an increased supply of 
money in Great Britain, might raise her prices to such 
an extent as to check greatly, or even stop entirely, 
her export trade. But in order to judge of the result we 
must look at the whole case : we must not forget the 
effect of the higher prices on her import trade. The 
outflow of money that would arise to pay for imports, 
would presently bring about a fall of her money-wages 
and prices, and her export of cloth would be resumed. 

If the rise of her money-wages be meant in the 
sense of greater purchasing power, her supply of money 
being no greater, but the laborers getting a larger pro- 
portion of it, then the answer is that the rise would 
have no effect on prices, and consequently would have 
no effect on the international trade. The only result 
would be a fall of the profits of English employers, and 
the fall would extend equally to all English industries. 
The producers of cloth could get no higher price for it at 
home than before, and would consequently have the same 
motive as before for sending it to us. 

Similarly a decline of money-wages and prices in the 
United States, caused by a diminished supply of money 
in this country, might temporarily stop the importation of 
goods from abroad ; but increase of exports would pres- 



Internal Trade may he "International." 347 

ently bring us increase of money from abroad, and this 
would raise our prices and money-wages again. On the 
other hand, a fall of money wages due simply to dimin- 
ished saving, would not cause our prices to fall. (See 
Chapter XIII., § 5.) It would only raise the profits of 
our employers. 

The true view, then, would seem to be that where a 
basis exists for exchange of products, owing to difference 
in the ratios of cost to cost, the trade itself will bring 
the scale of money-wages and prices in both countries 
into the proper relation for carrying on the exchange. 
But this adjustment does not affect the level of real 
wages in either. That is governed in every country, not 
by the absolute height of its money-wages and prices, 
but by the relation between the two. 

13. Much Domestic Trade is "International." — It must 
not be supposed that the foregoing principles apply only 
to trade between separate nations in the political sense. 
The word "international" is, in fact, not aptly chosen 
to designate the sort of exchanging to which it applies. 
All trade is subject to these principles, if it takes place 
between communities that have not free movement of 
savings and laborers from the one to the other. Much 
of the domestic trade of every country, especially of 
every large country, is "international" in the economic 
sense. In our own case, for example, the trade between 
north and south, or between the Pacific slope and the 
Atlantic slope, depends on the same conditions and fol- 
lows the same rule of values, as trade between the United 



348 Political Economy. 

States and the United Kingdom. The same is true of 
the trade between many sections of the country that are 
less widely separated. 

On the other hand, apart from the effects of Customs' 
regulations, there is nothing to distinguish the border 
trade of two neighboring countries from the local domes- 
tic trade of one and the same country. On the supposi- 
tion that the laborers on each side of the boundary line 
pass freely from the one side to the other in search of 
employment, the value of commodities in the border 
trade is governed by cost of production. That is to say, 
it is not "international" in the economic sense. 



CHAPTER XXVI. 

FREE TRADE AND PROTECTION. 

Thus far we have endeavored only to get at the facts 
of trade between countries. As to the points brought out 
there is, I think, no room for doubt or difference of opin- 
ion. We must now touch briefly on the grounds of the 
great controversy as to the benefits of international trade. 
I shall first endeavor to state briefly the general position 
or thesis maintained by each side in the controversy ; 
then I shall try to give a summary of the chief argu- 
ments and counter-arguments, by which the advocates 
of each theory commonly sustain their position : — 

1. The Theory of Free Trade. — The thesis of the Free- 
traders may be stated as follows : 

"Free Trade increases the productiveness of industry 
in all countries. It enables the people of every country 
to use their best natural advantages. It thus allows 
things to be produced where they can be produced most 
easily. The result is to make the product of universal 
industry greater than it could be, if the people of every 
country were required to produce all commodities at 
home. 

" For example, if under Free Trade, New England were 
found exchanging shoes for potatoes with Nova Scotia, 
the mere fact of the exchange would be proof that each 

349 



350 Political Economy. 



country was getting the imported article for less labor 
than it would cost her at home. For the price of shoes 
is higher in Nova Scotia than in New England, and the 
price of potatoes is higher in New England than in Nova 
Scotia ; otherwise the trade would not go on. The ratio 
of cost to cost must therefore be different in the two 
countries: how widely different could be known only by 
discovering how high duties would have to be imposed 
in order to stop the trade. Suppose the ratio of cost to 
cost in each country were found to be : for New England 
1 pair of shoes = 2 barrels of potatoes, and for Nova 
Scotia 1 pair of shoes = 3 barrels of potatoes. Suppose 
further that tliere are one thousand men in New England 
whose labor is to be used in procuring potatoes, and 
another one thousand in Nova Scotia whose labor is to 
be used in procuring shoes. The New-England laborers 
can produce 125,000 pairs of shoes in the same time they 
would require to produce 250,000 barrels of potatoes. 
The Nova-Scotia laborers can produce 300,000 barrels of 
potatoes in the same time they would require to produce 
100,000 pairs of shoes. If the New-England men pro- 
duce potatoes and the Nova -Scotia men produce shoes, 
the product for the two countries is 250,000 barrels of 
potatoes and 100,000 pairs of shoes. If, on the other 
hand, the New -England men produce shoes for Nova 
Scotia and the Nova Scotians produce potatoes for New 
England, the result is 125,000 pairs of shoes and 300,000 
barrels of potatoes. The difference .in favor of Free Trade 
(subject to some deduction for cost of transportation) is 
25,000 pairs of shoes and 50,000 barrels of potatoes. 

" This superior productiveness of industry in both coun- 
tries, under free exchange, goes to swell the rewards of 
producers. If all countries that have set up barriers 



Free, Trade and Protection. 351 

against free exchange should throw them down, the effect 
would be like that of an immense improvement in pro- 
duction. Wages and profits would be higher in all of 
them than before, because the product of industry would 
be greatly increased." 

2. The Protectionist Position. — The general position 
taken by the advocates of Protection may be stated as 
follows : 

" Every country ought to develop her resources of all 
kinds in a healthy and symmetrical proportion. The 
tendency of unrestricted trade with other countries is to 
create a lop-sided development. Certain lines of produc- 
tion, once entered upon, are liable to be followed to the 
exclusion of everything else. By the mere fact that they 
are established, that the requisite machinery, implements, 
skill, and business arrangements are at hand for carrying 
them on, they tend to absorb the whole energy of the 
people. 

" The result is injurious in every way. It condemns 
a people to lasting poverty, because it leads to the neg- 
lect of the national resources. The single product which 
receives all attention is produced in too great quantity, 
and commands but a small price in the foreign markets 
to which it has to be sent. Much of even this small 
price is eaten up in the costs of transportation and the 
charges of middlemen, so that the producers receive less 
and less for their labor. Yet there is no avenue of escape 
for them. The products of foreign labor, coming in with- 
out restriction, are sold at such low prices as to make 
hopeless any attempt to compete with them in producing 
like articles at home. The foreign producers have all 
the advantages of an established industry. They have the 



352 Political Economy. 



machinery, the skilled laborers, and possession of the mar- 
ket. They stand ready to crush any attempt at setting 
up a rival industry here. Eather than lose control, they 
would place their goods here at prices which would be 
simply ruinous to the home producer, struggling with 
the difficulties of starting a new industry. 

" Protection, on the other hand, guarantees to the 
founder of a new industry a safe and remunerative sale 
for his product. He is enabled to pass, without ruinous 
loss, through the early stages while he and his workmen 
are acquiring the necessary knowledge and skill, and 
while he is making those commercial connections which 
are necessary to the success of an enterprise. In this 
way a country builds up for itself a variety of industries. 
Its people have the great advantages that come from 
diversified pursuits. The growth of wealth is rapid, be- 
cause all the national resources are brought into use, and 
every producer is encouraged by the prospect of sure 
and adequate returns for his labor." 

GROUNDS OF THE PROTECTION THEORY. 

3. Answer to the Free Trade Argument as to Cost. — 

Turning now to the question of the effect of protective 
duties on the cost of commodities, the advocates of Pro- 
tection reply substantially as follows to the Free Trade 
argument : 

" Differences in advantages for different kinds of pro- 
duction in any country are largely artificial. The reason 
why Nova Scotia can produce only one hundred pairs of 
shoes with the labor that produces one hundred and fifty 
barrels of potatoes, is found in the fact that she has not 
applied herself to the production of shoes. If the impor- 



The Argument for Protection. 353 

tation of shoes from New England were prevented, capi- 
tal would be largely turned into the shoe industry, the 
machinery would be improved, the laborers would become 
more efficient, and presently Nova-Scotian labor would 
become as productive in the manufacture of shoes as that 
of New England. 

" Protection, it is true, may temporarily increase the cost 
of commodities, but in the long run its effect is rather to 
cheapen them. It brings the producer and the consumer 
side by side, and thus saves much needless labor in trans- 
porting things between countries. Though it excludes 
injurious foreign competition, it preserves the healthy 
competition of home producers. By the mutual rivalry 
of these, each of them endeavoring to produce his com- 
modity as cheaply as possible, every known device for 
saving labor is brought into use. The possession of a 
sure market enables the employers to invest their sav- 
ings, with confidence, in machinery and appliances of all 
kinds for carrying on the production in the most effective 
way. The result is that, in the long run, the productive- 
ness of labor is greatly increased by Protection. Of this 
fact many notable examples have occurred in our own 
history under the present tariff. Nearly all the most 
important commodities are cheaper now than they were 
before the tariff was adopted." 

4. Compensations for Temporary Increase of Cost under 
Protection. — " It follows that, even if there were no im- 
mediate compensations, a protective tariff admits of easy 
defence on the score of cost of commodities. Looked at 
merely as a device for eventually diminishing cost, any 
temporary sacrifice it calls for on the part of any class 
of consumers, is a wise and useful investment of the 
public resources. But there are immediate compensa- 



354 Political Economy. 



tions which, in themselves, more than counterbalance 
the temporary addition to cost. If, by the exclusion of 
New-England shoes. Nova Scotia must for a while pay 
more for her shoes, the immediate effect is an extension 
of her own home industries. The establishment of shoe 
factories increases the demand for her labor, and wages 
rise. Profits also rise, because a new opening is pre- 
sented for the profitable investment of savings. From 
being a community wholly given up to raising potatoes, 
she becomes a community enjoying diversified employ- 
ments, with all the social advantages resulting therefrom. 

" On the side of New England, the exclusion of Nova- 
Scotia potatoes gives needful encouragement to the farm- 
ers. These will get higher prices for their crop when 
they have the home market to themselves ; they will 
therefore increase the production, — will employ more 
laborers, and will pay higher wages than they could if 
embarrassed by the competition of Nova-Scotia farmers. 
The additional price the consumers of potatoes have to 
pay is not lost as it would be if paid to foreigners ; the 
money is paid to our own people and remains in the coun- 
try. The farmers of New England will buy more manu- 
factured goods than they could buy when they got less 
for their farm products. Thus, the money they receive 
will come back to those who have paid it. Further, the 
New-England manufacturers will be protected as well 
as the farmers ; they will have a sure home market for 
all they can produce, and will not be compelled to sell 
their wares in competition with foreign products. This 
will enable them to employ more laborers, and to pay 
higher wages, than they could if they were exposed to 
foreign competition. 

" In these ways Protection tends to make both wages 



The Argument for Protection. 355 

and profits high. It also makes a nation independent of 
foreign countries. Supplying all her own needs, she is 
able to pursue towards other nations a policy of becom- 
ing dignity and strength. In case of war, she is not 
taken at a disadvantage, but has within herself all the 
resources for self-support and vigorous action. 

" While a protective tariff is thus a good thing in itself, 
it is at the same time a source of revenue for the national 
government. It saves the people from the necessity of 
paying taxes. The revenue it yields comes out of the 
pockets of the foreign producers ; because whatever they 
send to us has to be sold here, after paying the duty, at 
the same price as the home product that pays no tax. 
Not only so but the protective tariff, by raising our prices, 
compels the people of other countries to pay us more 
for everything they buy of us than they would otherwise 
pay." 1 

5. Peculiar Necessity of Protection for the United 
States. — " But the great argument for a high tariff in 
the case of the United States, is the necessity of pro- 
tecting our laborers against the competition of the ill- 

1 I am not sure that this latter point is actually urged by protec- 
tionists ; but it is obviously true, so far as regards exchange of prod- 
ucts with free-trade countries. Suppose two countries have had free 
trade with each other and one of them imposes a protective tariff ; the 
first result is to check the movement of goods to the protected coun- 
try, leaving the reverse movement untouched. This leaves a balance 
to be paid in money by the free-trade country. The trade is gradually 
restored to equilibrium by the consequent rise of prices in the pro- 
tected country and a fall of prices in the other, — with the result indi- 
cated above. Of course, it may be urged in reply that the amount 
gained in this way is but a small compensation for the loss through 
diminished trade : and further, that if all countries adopted protection, 
the gain would disappear. 



356 Political Economy. 

paid laborers of European countries. Here it is common 
to introduce statistics showing that wage-rates in Great 
Britain are very considerably below the level of wages 
paid in the United States ; and that wage-rates in Ger- 
many, France, Belgium, and other continental countries, 
are in many industries not more than half as high as 
those paid to our laborers. 

" Now, if it were not for the tariff, European employ- 
ers, getting laborers at such low rates of wages, would be 
able to flood our markets with commodities of all sorts 
at very low prices ; prices so low in fact, tliat American 
employers must either give up hiring laborers altogether, 
or pay greatly reduced wages. The cost of transporta- 
tion has now been brought so low, that the natural pro- 
tection formerly afforded by our distance from Europe 
has practically disappeared. European products can now 
be sold in America at so slight an advance over the cost 
to the European employer, that, without the protection of 
a tariff, American industry must at once sink to the low 
level of wages and profits prevailing in Europe. In sup- 
port of this contention, the advocates of Protection cite 
freely from the statistics of wages and prices in European 
countries, showing that in every case the level is below 
ours, — except, of course, the prices of those commodities 
that are regularly exported from here to Europe. 

" Our own home market is the best and only sure 
market for American products. Much the greater part 
of everything that we produce finds its buyers here. If 
we surrender this market to foreigners, they have noth- 
ing to tender us in return that we do not substantially 
enjoy already. To give up our tariff, then, would be to 
cut down enormously the field for the employment of 
labor among us. Our most flourishing industries would 
be instantly struck down. 



The Argument for Protection. 357 

"The doctrine of Free Trade is an English invention, 
adapted only to further the interests of British manufac- 
turers. By means of it these hope to keep all other coun- 
tries in industrial vassalage to England. Every other 
country that has accepted the theory of Free Trade has 
been kept in backwardness and poverty. Those, on the 
other hand, that have pursued the policy of Protection, 
have grown and advanced in wealth with rapid strides." 

In support of this view, protectionist writers appeal to 
economic history, giving statistics of decline in Free-trade 
countries, and of industrial growth wherever Protection 
has prevailed. In fact, the protectionist argument runs 
throughout very much in that channel. It is largely an 
appeal to facts, which, in the view of the writers, go to 
show that Protection is either an industrial necessity, 
or has proved itself in practice to be a powerful agency 
in building up national prosperity. This makes it very 
difficult to state the case for Protection in brief form. It 
is an argument that does not easily accommodate itself 
to abridgement. 

The favorite field from which to draw proofs of the 
beneficent action of Protection, is the record of our own 
national growth under the system, especially the growth 
since the adoption of the present tariff. 

FREE TRADE REPLY. 

To these arguments the advocates of Free Trade reply 
in substance, as follows : 

6. Feebleness of Industries that Live by Protection. — 

"Differences in advantages for different kinds of produc- 



358 Political Economy. 

tiou in a country are, no doubt, sometimes artificial, but 
they are not usually so. The intelligence and enterprise 
of a country's business men may safely be trusted to 
discover and utilize its most favorable opportunities for 
the use of capital and labor. If industry be left without 
interference, it will spontaneously seek out the most 
productive channels for itself. The fundamental evil of 
a protective tariff is, that it makes very little attempt 
to distinguish the differences that are artificial and 
temporary, from those that are natural and lasting. It 
invites men to fly in the face of nature, passing by the 
better chance and taking the worse one. This is why 
tariff industries never get beyond the need of protection ; 
never are ready to stand on their own bottom. 

" If. as protectionists are apt to assume, the question 
were of giving temporary public aid in founding new 
industries, which, once established, could stand and flour- 
ish on their own merits, most free-traders would gladly 
share the burden of giving it, — whether by bounty or 
by temporary tax on the imported article. But the 
question is very rarely of that character. Men are apt 
to make the mistake of supposing that because we have 
reasonably good resources for the production of a given 
commodity, the producer of it would need only temporary 
protection. But it may happen that our resources of 
other kinds are vastly superior. In that case temporary 
protection would be of no avail; the moment it was 
withdrawn, trade would seek the easier way of procuring 
the commodity, — namely, by giving our more copious 
product in exchange for it. For what is called protec- 
tion against foreign competition is always, in reality, 
protection against our own better resources. Such pro- 
tection can never be withdrawn without the result of 



The Argument for Free Trade. 359 

sending our labor and capital back into their most pro- 
ductive channels. Witness the industries which are 
now still, after seventy years of greater or less (usually 
•greater) protection, as dependent on the tariff as they 
were at the beginning." 

7. The Question of Demand for Labor and for Prod- 
ucts. — " As to causing increased demand for labor, stop- 
page of trade with other countries can never do that. It 
only changes the direction of the demand. In proportion 
as you stop imports you stop exports too, in the long 
run. There is as much demand for labor to make shoes 
to be sent to Nova Scotia, in exchange for potatoes, as 
there would be to raise the potatoes at home. Further, 
the rewards of labor depend on its productiveness : and 
since interference with free exchange prevents us from 
getting things in the easiest way, it must lessen wages 
and profits. Any rise of money-wages due to a tariff 
is more than offset by the higher prices of most things 
laborers have to buy. 

"As to the market for products of labor, when a pro- 
tective tariff is first imposed, it does for a little while 
make the sale of some goods easier, by excluding foreign 
products. But herein it is simply like an issue of in- 
convertible currency : the effect lasts only till industry 
adjusts itself to the situation. Further, whatever a 
portion of the community gain, even temporarily, is at 
the expense of the rest. For, in the example of New 
England and Nova Scotia, the producers of potatoes in 
Nova Scotia and of shoes in New England find the mar- 
ket for their products narrowed by the tariff: what the 
others gain these lose, and much more besides. 

"Would New England gain by the exclusion of Dakota 
wheat, or of Texas beef ? Nobody argues that free trade 



360 Political Economy. 



between our States lessens the demand for labor, or for 
products of labor, in any part of the Union. What 
strange quality is it, in the national boundaries, that 
makes free trade with people living beyond them, so 
injurious to the whole country?" 

8. Question of Diversified Employments, etc. — " As to 
diversified industry, there is no danger that any civilized 
nation shall lack diversity of employments. The num- 
ber of commodities is many times too great to have any 
whole country devoted to producing any one, or even 
any twenty of them. It is mere absurdity to speak as 
if the whole population of the United States could in any 
case be farmers. Foreign countries would have no de- 
mand for one-half of the surplus crop that would be 
raised. Without the tariff, as with it, we should devote 
labor to agriculture only so far as that promised best re- 
turns. For the rest we should produce at home all things 
that we could not obtain more cheaply by exchange with 
other countries. Prices would arrange themselves so as 
to make this certain. 

"As to war, unrestricted trade between countries is 
the best guarantee for peace. It cultivates friendly inter- 
course. Besides, if it would make us dependent on our 
neighbors, it would make them equally dependent on us." 

9. Protective Duties the most Burdensome Taxes. — "So 
far from a protective tariff being a way to obtain a rev- 
enue without taxes, it is, in fact, the most burdensome 
form of taxation. The duties actually collected are paid 
by our own consumers, for no man imports a foreign 
product unless its price here is enough above the price 
in the other country to give the importer a profit. With- 
out the duty we should get it at a lower price. But the 
real burden of the tariff does not lie in the taxes we pay 



The Argument for Free Trade. 361 

under it. It deprives the people of many times more 
than it gives to the Treasury. The real loss lies in the 
diminished productiveness of our labor. The tariff closes 
to us the easiest ways of obtaining many of the things 
yfo, need, and forces us upon harder ways. It leaves us 
for our labor, fewer enjoyable commodities than we might 
have. The loss it inflicts is therefore not measurable. It 
is precisely such a loss as we should suffer if we were 
forbidden to cultivate our most fertile lands, to work 
our most productive mines, or to use our most effective 
machinery. 

" Suppose we had two areas of land, on one of which 
a given number of laborers could raise 250,000 barrels of 
potatoes, and on the other 300,000 barrels. What should 
we think of a law that should forbid the use of the 
better area? What should we answer if it were said in 
justification of the injury, that the poorer land could 
probably be made more productive than the other by 
improvements in agriculture ? — or that it would, at all 
events, give more employment to labor than the other ? " 

10. The Tariff and Wages. — " On the great question of 
wages, and competition with the pauper labor of Europe, 
the free-trader's answer is that wages in the United 
States will depend on the general law of wages, whether 
we have a tariff or not. Without the tariff, as with it, 
our capitalists would seek to make profits by employing 
labor. The tariff can only alter the direction in which 
labor shall be employed, and, as already pointed out, it 
alters it for the worse. 

" It is a fundamental error to suppose that the laborers 
of two exchanging countries are in competition with each 
other. The only way in which the pauper laborers of 
Europe can lower wages in America, is by coming over 



362 Political Economy. 



here to compete in our labor market. While they stay 
at home, the more cheaply they and their employers pro- 
duce commodities for us, the better it is for all classes 
of Americans, — hired laborers as well as others. If they 
stood ready to sell us their products for one-tenth of the 
prices they are likely to demand, the only effect would 
be to increase greatly the returns for capital and labor 
here. It would simply be for us like a labor-saving 
improvement, that should enormously cheapen those 
commodities. 

"This suggests the central fallacy of the whole pro- 
tectionist argument on this head. It takes for granted 
that Europe would overstock our markets with all com- 
modities, — • forgetting that she would expect products 
of ours in return. The freest trade could only result in 
a simple exchange of certain products of American labor 
for certain products of European labor ; and it is mere 
absurdity to allege that we should suffer injury by get- 
ting large quantities of Europe's products for small quan- 
tities of our own. It would be for Europe to complain 
in that case, not for us."^ 

The facts appealed to in support of Protection have 
been frequently traversed by free-trade writers. These 
explain and interpret the facts differently, — maintaining 
that the advocates of Protection make the mistake of 
attributing all the good that happens where Protection 
exists, to Protection, and all the evil where Free Trade 
exists, to Free Trade. The recent great development of 

^ The complaint of European protectionists is, in fact, the reverse 
of this, — namely that American products are too cheap. In spite of 
the high wages prevailing here, France and Germany have imposed 
protective duties on American products. 



Protection and Free Trade. 363 

the United States, for example, these writers attribute 
to the splendid natural resources of the country, and to 
the great improvements in production and transportation 
that have come into use in the last thirty years. Of those 
resources and improvements, they hold, we should have 
had even fuller advantage, had not the tariff hampered 
us in the most effective ways of using them. 

The advocates of Protection characterize the whole 
argument for Free Trade as a mere setting up of abstract 
theories in opposition to plain and visible facts. Their 
own view they assert to be that of practical men, familiar 
with the actual affairs and business necessities of the 
country. 

The advocates of Free Trade allege that the argument 
for Protection is based on a defective and fallacious view 
of the facts; that it persistently overlooks quite half of 
the case, and by resting too much on superficial and 
variable matters, such as the value of money in different 
countries, loses itself in a tangled web of mere sophistry 
and self-deception. 

With this brief outline of the arguments on each side, 
I leave the reader to sift and examine the contending 
claims for himself. The problem may seem highly com- 
plicated, but it is really not more so than most other 
questions in practical economics. A little careful think- 
ing, using the light of first principles, can hardly fail to 
lead to a just judgment upon the merits of these rival 
plans for promoting the general wealth. 



CHAPTER XXVIL 

CONCLUDING SUGGESTIONS ON VARIOUS TOPICS. 

We have now touched, in one form or another, on all 
the leading principles of economic theory. The more 
extended study of the subject consists mainly in ampli- 
fying these principles, in tracing out more fully their 
relations to each other, and in considering the modifi- 
cations to which they are subject in different states of 
society, and under different social and political institu- 
tions. 

By way of assisting the student in gaining a compre- 
hensive grasp of the whole subject, up to the point we 
have reached, the following notes, suggestions, and prac- 
tical applications are appended: — 

1. Particular and General Cases. — Many of the more 
common slips in reasoning about economic subjects, arise 
from failure to observe the difference between things that 
are universally true and things that are true only in 
limited cases. By way of help towards guarding against 
such slips, a careful study of the following truths is 
recommended : 

A. Things possible in limited cases but quite im- 
possible universally, — 

1. Any one commodity, or any limited number of 
commodities, may rise or fall in value at any time ; but 
364 



Particidar and General Cases. 365 

it is quite impossible for all commodities to rise or fall 
in value simultaneously. If some rise, others fall. 

2. Any one commodity, or any limited number of com- 
modities, may be produced in excess of the demand at 
any time; but it is quite impossible that all products 
should be in excess of the demand at one and the same 
time. If the supply of some things be excessive, the 
supply of other things is deficient to the same extent. 

These two propositions are intimately connected with 
each other. The only evidence of overproduction, in any 
case, is a fall in the value of the product. Since all 
things cannot fall in value simultaneously, there can be 
no simultaneous overproduction of all things. There 
can, however, be a general fall of prices ; and the situa- 
tion that brings it may have all the awkward features 
that would attend general overproduction. But it is 
highly important to keep in mind the fact that gold 
is a product of labor, and that a fall of prices is due to 
a deficient supply of this particular product. The use of 
money is so peculiar, and the opportunities for producing 
it are so limited, that one is apt to leave it out of view 
as a product of labor. A general fall of prices is in fact a 
call for more money ; just as a rise in the value of iron 
is a call for more iron. (See pages 137-140.) 

Eemembering that buying and selling are at bottom 
exchanging of products, it is easy to see that supply 
of one thing is demand for other things. Supply and 
demand are therefore simply opposite views of the things 
offered for sale. Do not, then, make the mistake of look- 



366 Political Economy. 

iiig at one .side only ; of looking, for example, at the 
farmer's supply of wheat, and forgetting his demand for 
the things he wishes to get in exchange for his wheat. 

3. Some men may gain by a general rise of prices; 
but it is quite impossible for all men to gain in that way. 
What some gain, others lose. 

B. Things always possible in limited cases, but not 
possible universally unless special conditions be fulfilled, — 

There are many of these ; and they are the source of 
most of the economic fallacies that prevail in the world 
in relation to wages, profits, prices, and the like. In 
dealing with questions relating to these subjects, we liave 
to be very careful to distinguish the two sets of cases. 
The following examples illustrate the point : 

1. The price of any one commodity or group of com- 
modities may rise or fall at any time, by reason of some 
circumstance peculiar to the commodity itself or to the 
group of commodities. But it is impossible for all com- 
modities to rise or fall in price simultaneously, unless 
there be a change either in the supply of money, or in 
the quantity of goods to be sold (the productiveness of 
industry). 

2. Money-wages in any one industry, or group of in- 
dustries, may rise or fall at any time for reasons pecu- 
liar to the industry or group of industries affected. But 
it is impossible for money-wages to rise or fall in all in- 
dustries simultaneously, unless there be a change either 
in the volume of money-savings or in the number of 
laborers to be hired. 



Particular and General Cases. 367 

3. A tax on any one commodity causes its value and 
price to rise ; but an equal tax on all products, including 
gold, would not raise the value, or the price, of any. It 
would simply lessen the rewards of producers. [Every 
tax on commodities has this latter effect, whether it acts 
through, or without, change of values. Compare the 
opposite case of improvements, page 106.] 

4. If the laborers should begin to abandon coal-mining, 
wages in that industry would have to be advanced, and 
the price of coal would rise ; but an equal rise of wages 
in all industries would not be attended by a general rise 
of prices. There would be a general fall of profits. Sim- - 
ilarly, a fall of wages in any one industry, owing to a 
greater inclination of the laborers to enter it, would 
bring a fall in the value and price of the product; but 
a general fall of wages would not cause a general fall of 
prices. It would only cause a general rise of profits. 
[The change of wages, in these cases, is not the cause 
of the change of value. Both changes are effects of the 
changed conduct of the laborers. See page 97.] 

The reason why the single case is so different from 
the general case is easily seen. In economics, as in other 
things, results must have adequate causes : you cannot 
make something out of nothing. If there be a regiment 
to feed, and only a certain quantity of bread and meat 
to do it with each day, everybody sees at once that 
the average share cannot exceed a certain amount. Any 
one company may have its allowance enlarged ; but in 
that case we readily see that the allowance to other 



368 • Political Econoiny. 



companies has to be diminished. Yet one is liable to 
argue about wages, prices, and such subjects, as if there 
could be a general rise at any time, without any addi- 
tional means for maintaining the rise. 

No doubt there is an elastic quality in the agencies 
that set the level of wages and prices. There is always 
a reserve of savings awaiting investment, of goods await- 
ing sale, of money awaiting expenditure, and of laborers 
seeking employment. In a loosely organized society, 
such as goes with individual liberty, these reserves are 
to a large extent necessary, and where not necessary they 
.are unavoidable. The existence of them, and the possi- 
bility of increasing or diminishing them, makes the action 
of economic principles less sharp and sudden than it 
would otherwise be. By drawing on, or adding to, these 
reserves, a temporary effect may be obtained at seeming 
variance with the general principle. The general level 
of prices may be raised somewhat for a time, without 
increase of money, on the simple condition of adding to 
the unsold stock. Wages may be temporarily raised at 
any time, without increase of saving, simply by drawing 
on the ordinary reserve of savings, or by adding to the 
number of laborers out of employment. There is, in fact, 
no limit to the prices sellers might ask, nor to the wages 
laborers might demand. The difficulty comes in selling 
the whole product at prices too high to match the exist- 
ing supply of money, and in finding employment for all 
laborers at wages too high to match the current flow 
of savings. 



Economic Principles require Time. 369 

2. Slow Working of Economic Principles. — The point 
just considered is a good illustration of a general truth 
which the student must always keep in mind, — namely, 
that economic principles take time to work themselves 
out. They are only certain to prevail in the long run. 
They have at any given moment very little of the char- 
acter of physical laws, which assert themselves irresisti- 
bly in every case. They are rather principles of human 
action, true of men in the average so long as they act 
intelligently. What we call the law of prices, for exam- 
ple, operates mainly as an argument presented to. the 
minds of those who have things to sell, or wish to buy. 
The argument is weak at first and may be thrust aside; 
but the longer it is resisted, the stronger it grows. In 
the long run men find resistance to be a source of loss, 
and we assume that for their own advantage they will 
yield. 

Every result that depends on competition must have 
the requisite time to work itself out ; and the less mobile 
the elements in the case, the longer the time necessary. 
For example, the values of commodities that require long 
time for their production are slower to conform to their 
cost than the values of commodities that are quickly 
made. Again, prices of things are much slower to fall 
when the situation requires a fall, than they are to 
rise when the situation warrants a rise. Everybody who 
has invested savings, counting on the old prices, is 
pledged to resist a fall. Undertakings that require ex- 
tensive machinery or other fixed capital, — railroads, for 



370 Political Economy. 

example, — are slower to have their profits brought to 
the common level, than undertakings that require but 
little outlay. This is especially true where, as in the 
case of railroads between most towns, only one such 
establishment is needed. If two be built there is not 
traffic enough to keep both fully employed, and the con- 
sequence is a "war of rates," which means total loss of 
earnings for both roads. Competition acts smoothly and 
effectively only when there is room for several competi- 
tors. As the country grows and business increases, it can 
hardly be doubted that competition will, in the long run, 
assert its force in railroad earnings as in other things. 

3." Temporary and Permanent Results. — Because econ- 
omic principles take time to work themselves out, it is 
essential for the student of economics to distinguish, in 
many cases, between temporary or immediate effects and 
the permanent results. We have had occasion to note 
a good many examples of this. Artificial interference 
with the natural progress or tendency of industry, is 
very apt to have an ultimate effect very different from 
that at the outset. 

(1) A tax suddenly imposed on the production or im- 
portation of any commodity would give, temporarily, 
high profits to those having stocks of the article but 
the high gains would not continue. 

(2) A strike, in favoring circumstances, may extort a 
rise of wages in any industry : but if wages were pre- 
viously as high as competition tended to make them, the 
rise cannot be maintained. 



Temporary and Permanent Effects. 371 

(3) An increase of the demand for any commodity 
raises the value temporarily, and with it the wages and 
profits of the producers ; but the permanent effect is to 
cause increased production of the commodity, without 
any excess of gains over those made in other industries. 
The converse is true in the case of diminished demand 
for an article. 

(4) The temporary effect of increasing the supply of 
money in a country may be to lower the rate of interest; 
also to quicken the sales of goods. But the permanent 
effect is only to lower the value of money, — that is, to 
cause a rise of prices (and money-wages). The rate of 
interest and the difficulties of trade return to their 
normal condition. 

(5) The temporary effect of increase in the number of 
laborers is to lower the rate of wages. The effect in the 
long run may only be to cause a proportional increase of 
savings, through increasing the product of industry. A 
constant addition has, however, the constant result of keep- 
ing wages somewhat lower than they would otherwise be. 

(6) A tariff on imports may have the temporary effect 
of causing high profits in the production of things pre- 
viously obtained by foreign trade, and low profits in the 
production of exports. In the long run, competition 
diverts capital and labor from the production of exports 
to the production of things formerly obtained by ex- 
change with other countries ; and profits in the tariff 
industries are brought to the same level as profits in the 
other industries. 



372 Foliticcd Economy. 

(7) Similarly when duties are abolished, tariff indus- 
tries are temporarily depressed, and other industries have 
their gains increased. But the effect in the long run is 
to divert capital and labor from the production of things 
previously excluded by the tariff, to the production of 
things to be exported in return for the new imports. 

4. Relation of Wages to Product, Prices, etc. — No part 
of economic theory presents so many points of difficulty 
as that which relates to wages, especially to the source 
and consequences of changes in wages. The subject is 
so important that the student ought to spare no pains in 
order to gain clear views regarding it. A careful study 
of the following cases can hardly fail to be of service in 
clearing up the relations of wages to profits, prices, and 
the productiveness of industry. 

Changes in the general level of individual wages 
present themselves, in practice, in one or other of the 
following forms : 

Case I. A change of money-wages, with a correspond- 
ing change of prices. 

Case II. A change of money-wages, without a corre- 
sponding change of prices. 

Case III. A change of prices, without a corresponding 
change of money-wages. 

Now it is evident, from the principles stated in the 
foregoing chapters, that four different elements come into 
play at any given time, in fixing the scale of money- 
wages and the general level of prices, namely: 

1. The number of laborers. 



Wages in a Growing Community. 373 

2. The total volume of commodities produced. 

3. The supply of money. 

4 The strength of the spirit of saving. 

Each of these elements is liable to change. The 
fourth, no doubt, changes but slowly, since it depends on 
the general character and temperament of men, — things 
which are not subject to violent fluctuations. But, in 
every growing country, the other three are constantly 
expanding. Every increase of population, every indus- 
trial improvement, every change in the supply of gold 
or in the use of substitutes for it, may have an effect, 
temporary or lasting, on the earnings of the individual 
laborer. Assuming the fourth element to be constant, 
the course of wages depends on the relative rate of in- 
crease of the other three. Of course, if the three expand 
equally, there is (on the assumption named) no effect on 
individual wages, money or real. But the three may 
not, and in fact usually do not, expand equally. There 
are three representative cases : 

A. All three expanding, but the supply of money not 
increasing at the same rate as the number of laborers 
and the volume of products (the two latter increasing 
equally) ; the general level of prices rises or falls, with 
a corresponding change of money-wages ; no necessary 
change of real wages, nor of profits. [Case I. above.] 
There may, however, be temporary effects of no small 
importance, owing to the difficulty of readjusting the 
scale of money-wages and of prices, so as to conform to 
the changed (relative) supply of money. (See Chapter 
XIIL, §§ 9 and 10.) 



374 Political Economy. 



B. All three increasing, but the number of laborers 
not increasing at the same rate as the volume of products 
and the supply of money (the two latter expanding 
equally) ; the general level of prices remains unchanged, 
but wages (both money and real) and profits rise or 
fall. If the increase of products and money be more 
rapid than the increase of laborers, the first effect is 
a rise of profits ; each employer has more goods to sell 
than before (in proportion to the number of laborers he 
employs), and there is no fall of value to offset the in- 
crease of quantity. The general rise of profits may 
be counted on to cause increase of savings, and thus to 
carry the greater part, or even the whole, of the increased 
product to wages. These are the effects of all general 
improvements in the arts of production, such as the in- 
vention of the steam-engine ; also, of every increase 
in the personal efficiency of the laborers in all industries. 
Both money and commodities become more plentiful, in 
comparison with the number of laborers : each man has 
more money and more good things for his labor. If, on 
the other hand, the increase of products and money be 
less rapid than the increase of laborers, the first effect 
is a decline of profits and this is followed by a falling-off 
in savings, — thus throwing a part, or even all, of the 
loss on wages. [Case II. above.] If the decrease of 
product be due to the necessity of pressing some classes 
of natural agents beyond their point of maximum return, 
there is a rise of some prices, and a fall of others, the 
general level remaining the same; and rents rise. 



Wages in a Growing Community. 375 

0. All three increasiag, but the volume of products 
not increasing at the same rate as the number of laborers 
and the supply of money : money-wages remain the same, 
but prices rise or fall and real wages and profits fall or 
rise. Though each man, whether laborer or employer, 
gets the same money-income as before, his income reck- 
oned in things is different. In this case the change of 
real wages is direct and automatic ; that is to say, it is 
not brought about through an antecedent effect on profits. 
When any of the things laborers consume are reduced 
in price, whether by improvements in production or by 
the opening of trade with other regions, the result is an 
immediate rise of real wages. Further, the rise is per- 
manent, unless by more rapid increase of numbers, the 
advantage be in part or wholly transferred to the em- 
ployers. The opposite result follows a rise of price of 
any of the things consumed by laborers, — whether the 
rise be due to increased cost of production, or to the 
cutting-off of trade with other communities. [Case III. 
above.] The differences between this case and the 
second, arise from the fact that here the laborer's earn- 
ing power, measured in money, does not change, whereas 
in the other case it does. The second case relates to 
universal changes in the productiveness of labor; this 
one to changes in particular industries other than the 
production of gold. As already pointed out (page 107), 
the course of affairs, in practice, presents a combination 
of the two cases. 

D. If now the general disposition to save becomes 



376 Political ^conovti/. 

stronger, each of the foregoing cases becomes modified 
in favor of wages and against profits. First of all, where 
population, product, and money increase equally, the 
more strenuous saving causes a rise of individual wages 
(both money and real) and a fall of profits, — giving, for 
the laborer the same effect as the first alternative under 
B. In A. money-wages rise more than prices, or do not 
fall so much : real wages rise and profits decline. In B. 
each man's wages (money and real) rise more than his 
product increases, or fall less than it decreases. In C. 
money-wages rise, and real wages rise more than propor- 
tionally to the increase of individual product, or fall less 
than the product falls off. In every case the advantage 
gained by the laborers, through increase of the disposi- 
tion to save, is gained at the expense of the employers' 
profits. 

5. The Question of an Eight-hour Law. — It is of the 
highest importance in the discussion of practical cases, 
to distinguish changes of wages that are at the expense of 
profits from those that are not so. In such a question as 
that of the proposed eight-hour law, for example, every- 
thing turns on the effect a reduction of hours would have 
on the volume of prod act. If in eight hours the laborers 
would produce as much as they now produce in ten 
hours, the change is in every way desirable ; it may be 
made without loss of wages, or profits. If, however, 
the reduction of hours means a reduction of product also, 
it involves a fall of profits, or of wages, or both. The 
question as to the product is one of fact, which economic 



Proposed Eiglit-Kour Law. 377 

theory cannot decide. But we may safely lay down the 
principle that a diminution of individual product implies 
an inevitable reduction of individual rewards. 

The reduction of hours, it is true, seems to be contem- 
plated only for certain classes of city laborers ; and the 
expectation may be that the decline of product in the 
eight-hour industries would be made good to the employ- 
ers by a rise of the value. This is, of course, conceivable ; 
but it is not therefore practicable. The result would 
obviously be to favor particular classes of laborers at 
the expense of the rest of the community. To maintain 
the favored classes in the enjoyment of higher wages for 
a day of eight hours, than other equally good laborers 
are getting for a day of ten or. even. twelve hours, would 
require that we should, in some way, give them a strict 
monopoly of the work. Otherwise competition would, 
in the long run, bring wages to correspond with the 
quantity of labor. 

QUESTIONS AND EXERCISES. 

1. Explain the process by which exports of merchandise are 
made to pay for imports. 

2. When a country exports more than she imports, what is the 
effect on the rate of exchange, and why? 

3. How are exports and imports kept roughly equal in money 
value (or aggregate price) ? 

4. Show that money-wages may differ more, in two exchanging 
countries, then the general level of prices can differ. 

5. Explain carefully the statement that international trade 
arises from differences in the comparative cost of producing the 
articles exchanged. 



378 Political Economy. 



6. Can differences in the general level of wages in two coun- 
tries cause a trade between them? 

7. Show that the cost to a country of its imports is the cost of 
producing its exports. 

8. Suppose labor became twice as productive as it is, in all 
our industries, what would the effect be on the cost to us of our 
imports? Would the change cause us to export or import any 
articles not now exported or imported ? 

9. There are two countries, A and B. Each of them produces 
at home its whole supply of wheat and cloth, and the prices in 
each are as follows : 

In A wheat is $1.50 a bushel; cloth, $1.00 a yard. 

In B wheat is $0.80 a bushel ; cloth, $1.00 a yard. 

If now trade be opened between them, what course will it prob- 
ably take ? What will determine the international value of wheat 
and cloth ? Does it follow that the production of either wheat or 
cloth will be wholly abandoned in either country? 

10. There are two countries, C and D, which have had no trade 
with each other. Prices and money-wages differ as follows : 

In C wheat is $2.00 a bushel ; cloth, $1.50 a yard ; coal, $8.00 
a ton ; shoes, $6.00 a pair ; wages, $3.00 a day. 

In D wheat is $1.00 a bushel ; cloth, $0.75 a yard ; coal, $4.00 
a ton ; shoes, $3.00 a pair ; wages, $2.00 a day. 

If trade be opened between them, what will be the probable 
course of affairs ? [Cost of transportation : wheat, 10 cents a 
bushel; cloth, 1 cent a yard; coal, $1.50 a ton; shoes, 2 cents 
a pair.] 

11. If in the jireceding example, the price of wheat in C had 
been $1.00 instead of $2.00, what difference would this make as 
regards the course of the trade? 

12. When a high tariff is adopted in a country, explain care- 
fully the effect on the industries producing exports. Give, step 
by step, the process by which, in such a case, exports and imports 
are restored to equality. 



Questions and Exercises. 379 

13. Do the same for the case of a country in which duties on 
imports are reduced or abolished. 

14. Taking the facts given in question 10, as representative of 
the general character of the two countries, C and D, which of them 
is best for a laborer to live in ? 

15. Why does not cost of production regulate the values of 
commodities in trade between countries ? Why does it do so in 
any trade ? 

16. Does the importation of goods lessen the market for the 
products of home labor in a country? 

17. What are the chief sources of difference in the comparative 
cost of commodities in different countries ? 

18. England buys of us annually about twice as much as we 
buy of her, [For 1888 the figures were three hundred and eight 
millions against one hundred and fifty millions of dollars' worth.] 
How do you reconcile this fact with the general principle of trade 
between countries? 

19 Show that the abolition of our tariff would probably be 
followed by a rise in the value of money in this country (i. e., by 
a fall of prices). 

20. Would all prices be likely to fall equally in that case ? 
Would the price of wheat, for example, fall as much as the price 
of glass-ware, or of cloth ? 

21. Would money-wages be likely to fall in the same ratio as 
the general level, or average, of prices? 

22. Show that foreign products might be excluded from our 
markets by means of duties on our exports. Show also how the 
situation would differ from that in which the exclusion was 
brought about by prohibitory duties on imports. 

23. If you had the power of adding ten per cent, to the wealth 
of the country, should you make the increase in money, or in 
other things ? If in money, would it be likely to remain with us ? 

24. Would the addition of a hundred millions to the coin m 
general circulation in the world, differ in effect from an equal 
extension of bank currency? 



380 Political Economy. 



25. Why is demand for commodities not a demand for labor? 
Is it so in any case? 

26. How does the use of Prison Labor in production .affect the 
interests of free laborers? 

27. Why are the wages of women lower than the wages of men? 

28. What is the fallacy of the doctrine that wages are paid out 
of the product of the labor they reward ? 

29. In what forms do changes of real wages present themselves? 
In what precise form do hired laborers receive benefit from rail- 
roads ? from increased personal efficiency on their own part in all 
industries? from lessened cost of producing clothing and fuel? 

30. Mention cases in which the permanent result of economic 
changes differs from the temporary result. 

31. Give examples illustrating the statement that " many things 
are always possible in every case singly, which are never possible 
universally, unless some special condition be fulfilled." 

32. Suppose the present owner of every hired house in New 
Tork, should make a present of it to the tenant, would house- 
rents fall in the city? 

33. A man mortgages his farm as security for a loan wherewith 
to build a mill. Supposing the farm and the mill to be taxed at 
their full value, ought the mortgage to be taxed also? Is the 
general wealth greater than it would be if the lender had built 
the mill himself? 

34. Show that a special tax on all farms, or on farm products, 
must fall on the consumers; but a tax on the economic rent of 
land, falls on the land-owners alone. 

35. If a special tax were suddenly imposed on the rent of land, 
show that it would be a practical confiscation of a portion of the 
wealth of the present owners. Would future purchasers be bur- 
dened by such a tax? [Remember how the price of land is fixed.] 

36. Show that the proposed Single Tax on land, in order to be 
just, must be confined to the increase of rent after the tax is 
imposed. 



INDEX. 



THE NUMBERS REFER TO PAGES. 



Abstinence, a pai't of the cost to 
employers, but not of the true 
cost of production, 75, 94, 269, 

387. 

Bank currency, 150. 

Bills of exchange, 324. 

Bimetallism, 177. 

Buying and selling, the separated 
halves of economic exchange, 
26; buying easier than sell- 
ing, 28. 

Capital, three forms of, 59 ; is 
consumed, 63; fixed and cir- 
culating, 64; the capital of 
to-day a legacy, 65 ; represents 
improvements, 66, 70; hew 
created, 66, 76 ; owned by a 
few, 72 ; how related to sav- 
ings, 68, 74 ; cost of, 255. 

Competition, in selling, 89 ; tends 
to equality of rewards, 105, 
215, 226; erroneous view of, 
216 ; combinations to defeat, 
118, 281, 266; obstructed in 
its action, 113, 217, 229. 



Cost, to the employer, 92, 254- 
266, 269 ; true or economic 
cost, 94, 104, and appendix 
note ; cost in both senses, 
made up of many small parts, 
102; difficulty of analyzing, 
104; economic cost governs 
natural value, 105 ; lessened 
by improvements, 106 ; does 
not include risk, 108 ; relation 
of to international value, 332 ; 
sources of difference in com- 
parative cost, 343. 

Demand and supply, action of in 
fixing market value, 89 ; de- 
mand for commodities not a 
demand for labor, 237 ;. de- 
mand for commodities not les- 
sened by saving, 239. 

Deposits (bank) as currency, 151. 

Diminishing returns, law of, 294 ; 
consequences of, 310. 

Division of labor, advantages of, 
18; makes exchange neces- 
sary, 22 ; how men know what 
to produce under, 105. 
381 



382 



Index. 



Double standard, 167. 

Dull times, nature of, 138, 164. 

Employers, function of, 73 ; prof- 
its of, see Profits ; not respon- 
sible for low wages of women, 
224: ; employer's cost, 92, 254, 
269, 387. 

Exchange of products made ne- 
cessary by division of labor, 
22 ; obscured by use of money, 
26 ; carried on by traders, 28 ; 
complicated with payment of 
wages, 33, 133, 139, 164, 238, 
241 ; must keep pace with pro- 
duction, 88, 128; exchange 
between nations, 323. 

Exports, pay for imports, 325, 
and tend to equality with, 328. 

Free Trade and Protection, 349. 

Gold, nominal and real demand 
and supply of, 142; uses of, 
143 ; has no price, 145 ; pro- 
duction of, 145; profits of gold- 
mining affected by changes of 
prices, 146, note ; how the care- 
ful keeping of the precious 
metals affects their value, 147 ; 
questions between gold and 
silver, 166 ; gold standard, 170 ; 
movements of gold between 
countries, chap. xxv. 

Improvements in production, 
effect of on values, 106; on 
wages and profits, 107, 373; 



agricultural improvements, 

301. 
Inconvertible notes, 182. 
Interest, 196, 259, 270. 
International trade, -323. 
Inventors, importance of, 71. 

Labor, as an element in cost of 
production, 95 ; cost of differs 
to different employers, 257 ; 
division of, 18 ; productive 
labor, 52 ; productiveness of, 
54 ; non-productive labor, 53, 
226, 320 ; prison labor, 248. 

Laborers, classes of, 214; may 
raise wages by increased effi- 
ciency, 233, 235, 374 ; not ben- 
efited by those who buy goods, 
236 ; constitute a market for 
all they can produce, 238. 

Land, grades of, 44 ; rent of, 288 ; 
city rents, 306 ; why price of 
land so variable, 309. 

Legal tender notes, 154, 156 ; in- 
convertible, 183. 

Materials, a form of capital, 60. 

Money, the struggle for, 17 ; uses 
of, 25; value of, 122; 'circula- 
tion of, 124, 130; two func- 
tions of, 133 ; nominal and real 
demand and supply of, 127, 
142; value of differs in differ- 
ent countries, 94, 329. 

Money-wages, 123, 198, 372; scale 
of important only in relation to 
prices, 34, 197, 235; differ in 
different countries, 336. 



Index. 



383 



Natural wealth, 40 ; law of value 

of, 46, 109. See also Rent and 

Land. 
Natural value, 105; of money, 

123. 
Normal wages and profits, 203, 

224. 

Overproduction possible in sin- 
gle commodities, 78, 262, but 
not in all, 138, 248, 365. 

Particular and general cases, 364. 

Population, effects of growth of, 
46, 289 ; chects on increase of, 
314 ; ultimate limits of, 317. 

Price, how distinguished from 
value, 86; how the general 
level of prices is fixed, 127, 
142 ; prices in international 
trade, 94, 328. 

Prison labor, production by, not 
injurious to free laborers, 248. 

Production, nature of, 41, 52, 94 ; 
requisites for, 58 ; in progress, 
62. 

Productiveness of labor, 54 ; re- 
lation of to wages, 199, 225, 
310, 374. 

Profits, nature of 195; normal, 
203 ; rate of, hard to discover, 
208; profits may become wages, 
211, 236 ; profits of individual 
employers, 251. 

Protection and free trade, 349. 

Questions and exercises, 35, 83, 
120, 192, 321, 377. 



Rent, 286-309; rents may be- 
come wages, 319. 

Risk, an element in employer's 
cost, 78, 262 ; but not in eco- 
nomic cost, 108. 

Savings, relation of to capital, 
75; to wages, 76, 197,373; to 
the rate of profits, 201, 225: 
not increased by strikes, 233 ; 
increase of saving does not 
lessen demand for goods, 239 ; 
replacement of savings ex- 
pended, 209, 211. 

Selling, difficulties of, 28 ; these 
not due to scarcity of money, 
190; profit and loss by sales, 
260. 

Silver, convenience of, 165; de- 
cline of value, 172 ; silver cer- 
tificates, 154, 158 note; Silver 
Purchase Acts of 1878 and 
1890, and their effects, 173; 
the silver in the Treasury not 
a reserve, 176. See also gold. 

Skilled labor, products of, 113; 
wages of, 220. 

Slow working of economic prin- 
ciples, 369. 

Strikes, 232. 

Supply and demand, 89 ; in the 
case of money, 124 ; supply of 
one thing demand for other 
things, 365. 

Tariff, on imports, 381. 
Temporary and permanent re 
suits, 370. 



B84 



Index. 



Trusts, 118, 266. 

Value, 86 ; connection with cost 
of production, 101, 105; how 
affected by improvements, 106, 
375; value of natural wealtli, 
109 ; of products of skill, 112; 
of things having' a joint cost, 
115 ; governed by cost of most 
costly part, 296 ; relation of 
value to rent, 298; interna- 
tional values, 115, 337 ; general 
rise or fall of values impos- 
sible, 87, 248, 365; value not 
an attribute of all wealth, 46, 
252 note; increase in value of 
natural wealth not a general 
gain, 50. 

Wages, industrial consequences 
of, 77 ; principles governing 
aggregate wages, 194; individ- 
ual wages, 212 ; equalizing ten- 
dency of competition, 215 ; 
normal and market wages, 203, 
224 ; relation of wages to 
product. 196; not found by 
deducting profits from the 
product, 211 ; raised by im- 



provements, 106, 374 ; but not 
by strikes, 232 ; not lowered 
by production in prisons, 248; 
wages and the circulation of 
money, 133, 198, 241; real 
wages depend on the relation 
of money-wages to prices, 34, 
198, 235, 372; high profits 
favorable to high wages, 235, 
374 ; free spending is not so, 
236 ; wages advanced out of 
savings, 75, 242; extent of the 
advance, 245 ; fallacy of deny- 
ing the advance, 247 ; wages 
of women, 223 ; of non-pro- 
ductive laborers, 226 ; wages 
differ in different countries, 
220 ; these differences not a 
cause of international trade, 
345. See also Money-wages. 

Wealth, defined, 36 ; natural 
wealth and wealth produced 
by labor, 39 ; how natural 
wealth acquires value, 43, 109 ; 
production of wealth, 41, 52; 
value of, 86. 

Waiting, an element in cost cf 
production, 72, 95, 99, 387. 



